A new study by Conning, an investment management company for the insurance industry, finds that reinsurers are increasingly using insurance linked securities and predicts that the share of ILS of the global reinsurance capacity is set to grow.
Insurance linked securities are investments whose underlying performance and risk of loss is tied to an insurance risk. The different forms of ILS such as bonds, reinsurance contracts, derivative instruments or equity investments in a special purpose vehicle are used by reinsurers to transfer often catastrophic insurance risks to financial market investors.
The insurance linked securities market, which is made up of catastrophe bonds, collateralised reinsurance, sidecar vehicles and industry loss warranties, accounts for about 15 per cent of total estimated property-catastrophe reinsurance capacity, and has attracted increased reinsurer and investor participation, according to the study by Conning.
“The insurance linked securities market has become increasingly attractive to both investors and reinsurers,” said Steve Webersen, managing director at Conning. Investors are attracted to these non-correlated diversifying investments and the historical returns the asset class has delivered, he said.
“Reinsurers, meanwhile, have recognised that this market is here to stay, and are extending their business models to establish relationships with ILS funds and develop their own internal capabilities,” he said.
“The market has expanded well beyond its cat bond beginnings, and further growth opportunities will include collateralised reinsurance and sidecar markets.”
Stephan Christiansen, director of research at Conning, said that insurance linked securities are having an impact on the overall reinsurer business model.
“Our assessment is that reinsurers are evolving to offer additional solutions to their clients while not losing business to the ILS market. We anticipate that as additional capital flows into the market, reinsurers and capital providers will experience pricing pressure,” Mr. Christiansen said. “We also anticipate that insurance linked securities will capture a growing share of reinsurance capacity.”
The Conning study, “Insurance Linked Securities: As Alternative Risk Transfer Goes Mainstream, the Reinsurer Business Model is Changing” reviews the insurance linked securities market, its development, and perspective from both investor and insurer standpoints.
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