29 January 2015 Alternative Risk Transfer

Secondary ILS market to drive trading complexity

A larger secondary market in the insurance linked securities (ILS) sector would likely encourage new investors and bring a level of depth to the market that is currently unavailable.

That is the opinion of James Slaughter, senior vice president and director of global reinsurance strategy at Liberty Mutual and Martin Davies, chief executive at AHJ Capital Markets.

“From a general market perspective a secondary market should provide some of the following benefits: price discovery, liquidity to reinsurers to manage portfolios and a market for ‘alternative’ capital to deploy its assets to achieve their aims without diluting the small primary market,” said Slaughter.

He also said that broadening the secondary market would not only encourage new types of investors to move into the space as ILS becomes easier to trade, but would also create a much more liquid space for them to move into and out of freely.

However, in the current market, Slaughter said that a larger secondary market would be unlikely to provide long-term advantages to buyers.

“In the current market, it is likely that this will just fuel an arbitrage market rather than provide long-term advantages to buyers. At the moment there is simply a surplus of capital and if it can find quick and easy ways to deploy, then it will seek those opportunities.

“As a buyer anything that works to improve access to cost-effective sources of appropriate capital is welcome, but from a legal and regulatory perspective the secondary market is unlikely going to be a market for buyers that make a capital market for the sellers of reinsurance.”

Speaking of the market’s ability to grow, Davies added: “We are starting to see the embryo of a working secondary market, and while the traditional reinsurance market has been reluctant to adopt electronic trading, it is likely that such a platform, combined with electronic documentation and a recognised clearinghouse system would work very well for secondary ILS trading—and probably for new issues as well.

“True secondary markets lead to lower risk transfer prices, deep liquidity, transparency of pricing that influences the primary market and allows for complex trading and the ability to unwind risk and collateral positions efficiently. Any combination of these would change the reinsurance market profoundly and open up many opportunities for perceptive investors.”

To read the full feature on the Intelligent Insurer website, click here.

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