willis
James Vickers (Left), chairman Willis Re International, and Andrew Souter, regional director Willis Re
31 October 2018 Alternative Risk Transfer

Asia ILS growth limited short term: Willis

The growth potential of insurance-linked securities (ILS) in Asia is limited due to a lack of demand, James Vickers, chairman Willis Re International, and Andrew Souter, regional director Willis Re, told SIRC Today.

While models have improved in the past five years and investors would be willing to write natural catastrophe risks in the region, the demand is just not there at the moment, they said.

In Asia, ILS use has been relatively limited so far, Souter said. While ILS usage may be an established form of capacity in Japan, Australia and New Zealand, elsewhere in Asia its use is unlikely to grow fast, he suggested.

Five years ago, models for Asia nat cat outside of Japan were arguably not very good, but there has been significant improvement since and this is no longer a hindrance for ILS transactions, Vickers said.

“The problem is not the capacity. ILS would have an interest to write this. Aside from absolute pricing, the problem is one of demand,” Vickers noted.

Organisations like the World Bank or the Asian Development Bank are working on increasing insurance penetration and therefore demand, but Vickers sees an additional issue that could prevent an increase in ILS takeup in the region.

“Cat bonds are administratively difficult whereas everybody knows how a traditional reinsurance contract works. Cedants get everything they need from the original reinsurers,” he explained.

Meanwhile, the use of alternative capital in the region may grow as Asian-based reinsurers start increasingly to look at this source of capacity as part of their strategy, Souter said.

“We are seeing globally that more reinsurers are using ILS capacity in a strategic manner. If there is any area where the capacity is going to grow in Asia, it is likely to be the Asian-based reinsurers that look at this capacity as part of their strategy,” Souter said.

“Reinsurers are seeing ILS as a fundamental part of their business model to reduce the cost of capital and shift the business model to fees rather than just premium, which is likely to filter through to the reinsurers based in this region as well,” Souter explained.

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