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9 September 2018 Alternative Risk Transfer

ILS expands into new perils

Insurance-linked securities (ILS) are expanding into new perils following investors’ appetite, and London might benefit from this growth potential following the introduction of a new regulatory framework, Jean-Louis Monnier, Swiss Re Capital Markets global co-head of ILS, told Monte Carlo Today.

ILS is exploring perils including flood, which has not been covered much in the past, Monnier says. Beyond pure catastrophe risk, risks such as terror or cyber, operational risk, and motor could also be securitised, he said.

“Investors clearly have an appetite for new risks,” Monnier said. “There is an appetite from investors because new perils bring diversification.”

One of the winners of this trend could be London, which is likely to benefit from investors’ appetite for new risks as it aims to attract securitisation deals. In November 2017, the UK introduced a regulatory and tax framework for ILS business which is aimed at establishing London as a hub for these securities.

In June, Atlas Capital UK 2018 became the first cat bond placed on the London Market, providing SCOR with multi-year risk transfer capacity of $300 million to protect itself against named storms in the US, earthquakes in the US and Canada, and windstorms in Europe.

“The framework that has been established in London is competitive,” Monnier said. “Bermuda may initially lose some business from the UK, but the market should grow overall.

“The UK ILS framework may help new perils and new regions be securitised in the capital markets. This may come from synergies that are created when a diverse talent and cedant pool takes a fresh look into new securitisation opportunities.”

London may benefit from ILS expansion into new areas such as casualty business and even transferring risk for countries or non-government organisations that have not used ILS before. All this will also help bridge the protection gap, Monnier added.

“You would expect Lloyd’s to use London as a marketplace,” he said.

What may be slowing down the ILS expansion into new fields is the existence of appropriate modelling tools, according to Monnier. “There needs to be a clearly defined risk that can be modelled,” he said.

Appropriate modelling techniques are still missing for example in terrorism and in cyber, he noted.

A new development that Monnier is observing in the market is that some of the bigger ILS funds are seeking ratings. This would allow them to diversify.

“Some ILS funds are getting rating agencies involved to be able to get an element of leverage within the fund, getting the benefit of diversification and being able to write on the margin some reinsurance that would not be fully collateralised and instead rely on the rating,” Monnier said.

A rating provides the fund with more flexibility and is a tool that will be used only by firms that offer both retrocession and bond investments, he explained. “It’s a way to optimise the risk-return profile of an ILS fund.”

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