12 May 2014 Insurance

ILS one of 10 ‘disruptive innovations’ to watch

The research division of investment bank Citi has identified insurance securitisation and the use of alternative capital in reinsurance as one of ten disruptive innovations with the potential to fundamentally change the markets they apply to.

In a report, Citi notes that the phrase disruptive innovation was first coined in 1995 by Harvard Business School Professors Clayton Christensen and Joseph Bower. The term applies where a market or sector is transformed by introducing simplicity, convenience, accessibility and affordability where complication and high cost are the status quo.

Commenting on why the securitisation of insurance risk should be viewed in this way, Kathleen Boyle, editor of the Citi Group report, said: “Typically thought of as a sleepy industry, insurance wouldn’t normally be thought of as a place where you would find disruptive innovation. But the latest surge in insurance securitisation through the issuance of insurance-linked securities (ILS) has disrupted the market and forced industry players to consider potentially radical changes to their existing strategies.”

The part of the report that discusses ILS is written by Todd Bault, head of US P&C Insurance Research at Citi, and Erik Bass, the firm’s US life analyst.

They acknowledge that while ILS has in fact been used for what is approaching two decades, it is now picking up pace and starting to change the market.

“Securitisation is indeed the most disruptive long-term force we see at present: it is already cutting prices, changing market shares, birthing new players, and forcing old ones to consider potentially radial changes to their existing strategies,” they said.

The report notes that ILS has taken longer to develop than had perhaps been expected but provides data analysis that suggests that ILS is now producing better risk adjusted returns than traditional reinsurance.

Some of the other ten technologies to watch include 4-D printing, digital currency, digital marketing and electric vehicles.

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