13 September 2017 Insurance

Specialty lines ‘the next frontier’ for ILS

As insurance-linked securities (ILS) become increasingly attractive to investors, there is an opportunity to support both emerging and existing lines of business if the right product is in place, Michael Krefta, CEO of Hiscox Re & ILS, told Monte Carlo Today.

“ILS in general has now penetrated the marketplace to a lesser or greater extent, depending on the geography and the product,” Krefta noted.

“There has been huge penetration into the property-catastrophe space, but the next frontier for ILS is to find solutions for insurance and specialty products.”

This week Hiscox has soft-launched a new flood product, FloodXtra, which uses remote sensing, location level data, and topography data to work out the probability of a flood occurring in any individual postcode.

“The link back to ILS is that we have the opportunity to increasingly deploy those types of products against an ILS base,” Krefta said.

“It’s exciting for growing ILS funds and helps allow our clients to help fill the insurance gap. The takeaway for me from these last two hurricanes is just how underinsured even America is.”

For growth in this area to continue, Krefta stressed the importance of a product providing the right pricing as well as protection.

“At the moment I don’t think the market has this. The National Flood Insurance Program (NFIP) has proved it is very challenging to price individual flood risk,” he said.

“By using the latest technology in products to create a marketplace, ILS will follow. We think too much about capacity before we’ve thought about the product.”

Citing recent flood events in the US, and earthquake risk in California or Japan, Krefta believes these areas are “chronically underinsured”, not because there is a lack of interest or capital behind those things, but purely because the product isn’t fit for purpose.

“The question is how we make the products more beneficial to clients. How do we ensure better insurance penetration by leveraging what is a burgeoning reinsurance marketplace? Then you work out how you sell that and what capital you use to underpin it,” he concluded.

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