peter-dunlop-walkers
Peter Dunlop, partner at law firm Walkers
11 September 2019 Insurance

Trapped capital is driving force behind ILS looking at rated paper

The challenge of solving the problem of trapped capital is one of the drivers behind a number of insurance-linked securities (ILS) funds considering the possibility of launching reinsurers with rated balance sheets, Peter Dunlop, partner at law firm Walkers, told Monte Carlo Today.

He said that recent losses had exposed this as a structural problem in deals that use special purpose insurers (SPI) backed by alternative capital.

“While a number of parties are trying to solve this problem by altering so-called buffer tables, which determine at what exposure point capital gets trapped even if the full trigger has not been reached, there is no obvious solution to this problem in the long term,” Dunlop said.

“It is at the discretion of the buyer to release the capital and they will only do so when they are comfortable they have a final loss number,” he said.

“Loss creep is unavoidable with some type of cat events and that shows that maybe these structures are less preferable to rated platforms not on some risks.

“While there is an aspiration in the market to solve the issue through uniform contract wordings, this will be very difficult. That is why there is more talk about the possibility of creating rated balance sheets,” he added.

Playing into this market sentiment, he praised moves by the Bermuda Monetary Authority to create a new class of reinsurer, the regulation and capital requirements of which would be specifically designed to suit companies operating in the collateralised reinsurance space.

The idea was to fill a gap in the market that exists between the SPI model and the heavily regulated class 3a or 3b reinsurers.

“As the nature of collateralised products has become more complex, especially with some players using outwards reinsurance as part of the collateral package, the need for something like this has become clear,” Dunlop said.

“We expect that although some players using the SPI structures may move up to use it, other players may also move down and seek a lighter regulatory touch.

“The BMA is very good at consulting with the market and will listen to what the market wants,” he concluded.

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