ILS must reach new territories: PERILS
Insurance-linked securities (ILS) must grow into new territories, covering new perils and secondary catastrophe events such as flood in Central and Eastern Europe.
That is the opinion of Eduard Held, head of sales and products for PERILS AG, speaking to Intelligent Insurer.
Held said that other perils must catch up with the dominating US wind and US quake securities if the industry is to advance.
“US peak risk continues to dominate compared to European wind, and ILS—as a risk transfer instrument and as an asset class—must grow into new territories, covering new perils and secondary cat events, such as flood in Central and Eastern Europe,” he said.
“As with any product or commodity, the main requirement for its success is that there is a fundamental market demand. For ILS products one can take as a proxy for demand the probable maximum market loss (market PML), e.g., the expected insured industry loss to occur once in 250 years. For the two peak US risks which dominate the ILS arena, the scale of the PML compared to perils such as European windstorm is significantly higher.”
Held said that when comparing spreads paid for different perils, the two US peak risks are far in front of any other peril – a key factor for investors.
However, while the ILS potential afforded by the peak US and European risks is firmly established in the capital market mindset, Held explained that a number of additional secondary perils are also gaining traction with investors.
“The placement of Bosphorus 1 Re on behalf of the Turkish Catastrophe Insurance Pool (TCIP) served to demonstrate growing capital market interest in expanding the European risk pool, with the deal being upsized to $400 million due to the level of investor support for the transaction,” he said.
“Perils such as Turkey earthquake or Central and Eastern Europe flood make an attractive ILS proposition, particularly given the diversification benefits they provide. Yet to stimulate the market for secondary perils there needs to be a greater willingness on the part of sponsors to access the potential of the capital markets for such risks.”
Held also spoke of other restricting factors preventing growth in the market, such as the time it takes to bring a transaction to the market, the costs involved and the lack of reinstatement in these instruments.
“A further hurdle to the ongoing expansion of ILS as a risk transfer instrument for re/insurers is the lack of reinstatement. Whereas with a standard reinsurance contract, the reinstatement clause will ensure that in the event of a loss occurring a subsequent event will automatically be covered, such a mechanism does not yet exist for ILS transactions,” he said.
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