Insurance-Linked Securities Flourish as Reinsurance “Light”

Insurance-linked securities (ILS) issuers and investors have come to accept the sector’s ‘complementary”role compared to traditional cover and many are prepared to become consistent players in the market going forward, according to speakers at the Standard & Poor’s Insurance Conference in New York on Wednesday.

“We are at that watershed moment,” said David Priebe, vice chairman of broker Guy Carpenter during a panel on catastrophe management. “The convergance market is here and it’s an important tool for the industry, just as is traditional reinsurance and collateralized reinsurance.”

Priebe pointed out that the catastrophe bond market got off to a strong start in 2012 with over $3.8 billion in new in new issuance which could hit between $5 billion to $7.5 by the end of the year. That would also translate into a record number of in-force bonds catastrophe bonds in 2012; approximately $15.5 billion to $17 billion.

But rather than pushing traditional reinsurance off its perch, Priebe said that the resurgence of the catastrophe bond market shows that both issuers and investors see the securities as another risk management tool rather than a replacement for traditional cover.

“Its all a catastrophe reinsurance market, it just depends who is providing it,” Priebe said. “Right now, in terms of the flow of [investor] funds, cat bonds are providing higher returns. And issuers are looking for multiple sources of capital; traditional, ILS and collateralized.”

Investors seeking higher yield and issuers seeking competitive capacity have buoyed the alternative risk transfer market as a whole over the past year, with approximately $35 billion in catastrophe limits placed in non traditional market of ILS and collateralized reinsurance, Priebe said. That represents about 14 percent of the total catastrophe risk market.

“You are seeing the dedicated ILS funds become light reinsurers,” Priebe explained. “They are people that understand risk modeling and understand underwriting.”

New issuers in catastrophe bonds — such as Florida’s Citizens Property Insurance — are also approaching the market from a new perspective, Priebe explained. “[Citizens] placed a $750 million limit with a price that — compared with the traditional market — was appropriate for that risk. Now they can access counter-party credit through cat bonds and traditional market. That is a signal to other buyers”

Investors appetite for catastrophe bonds is also increasing, with large pension funds entering the market, said Peter Nakada, managing director of risk markets for catastrophe modeler Risk Managment Solutions.

“Pension funds are coming in like crazy,” Nakada said. “Over the past year we met with three pension funds with over $100 billion in assets so show how you model cat bonds. They all ended up allocating.”

Nakada added that as long as ILS and alternatives continue to offer decent, “uncorrelated” returns investors will continue to enter the space. “This asset class is a poster child for non-systemic risk. The driver of the risk — catastrophes — is uncorrelated to the global financial markets. It’s perfect storm for the ILS class.”

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