ILS leads the way in catastrophe markets, may help closing the protection gap

The catastrophe bond markets represent the leading indicator of where catastrophe pricing is heading and may help closing the protection gap, believes John Seo, co-founding partner of Fermat Capital Management.

Cat bond prices are negotiated and settled on very frequently, each trade reflecting investor sentiment towards that risk, while the traditional market is very relationship-driven and trades two or three times a year at most, he explained.

The latter “is also always looking in the rear-view mirror. As you would expect of any market that trades that infrequently it is much more slow-moving in the way it reacts to sentiment, events or any factor that may influence the price,” Seo said.

Seo believes the ILS markets have exhibited a track record of leadership in the way they have taken on some cat risks at prices below levels the traditional market swore it would never go to. Nonetheless, it has followed and the market has changed in the process.

Cat bond investors have simply followed logic, analytics and made decisions based on the data available. The result has been good for the market as a whole and the industry’s ability to manage peak risks, Seo said.

He also thinks the ILS markets and the skillset within, could help expand the range and scale of risks that are tackled by the risk transfer industry and help close the so-called protection gap in the process.

Capital markets capacity leveraging risk transfer structures such as ILS could be the solution to the growing protection gap emerging between the risks companies need covered and the types of insurance offered by the traditional sector, Seo believes.

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