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Don’t let the insurance linked securities vine wither

Don’t let the insurance linked securities vine wither | Insurance Business

Don’t let the insurance linked securities vine wither

The insurance linked securities (ILS) market grew to $93 billion in 2018, up from $88 billion during the prior year, according to an ILS Market Update from Willis Re. Despite multiple smaller catastrophic events in 2018 and a meaningful series of catastrophes in 2017, the market remained strong. However, at the start of 2019, ILS capacity was down due to participants having paid out on 2018 claims and the flight of opportunistic investors from the market. The first quarter of this year has been rather “wait and see” as investors anticipate what might happen in 2019 in terms of catastrophe activity. So where does the nascent UK ILS market sit in this bigger picture?

The UK's ILS regulations came into force on December 08, 2017, and was the culmination of a commitment by the government first announced in its 2015 budget. It was seen as a positive addition to the London Market’s reinsurance offering at a time when global reinsurance premiums flowing into London were declining (London Matters report 2017). The ability to transact in London also brings with it a certain amount of credibility and legitimacy to ILS and it creates opportunities for those investors who currently find it hard to access an ILS product in the traditional offshore jurisdiction.

Getting off the mark

Within two weeks of the new law being passed in December 2017, the first ILS authorisation was agreed - a sidecar vehicle to support the property portfolio of a Lloyd’s syndicate which went on risk from January 01, 2018. This vehicle falls into the category of property catastrophe risk that marked the beginning of the ILS market in offshore locations.

2018 was perhaps quieter in terms of activity than some would have liked, but that, realistically, was the most likely outcome as the regulator became comfortable with the process by getting a few key deals under its belt. At the end of 2018, the PRA asked for industry feedback on the application process. We were delighted to hear this since speed-to-market is key if London is to genuinely compete with the established ILS markets, and the efficiency of regulatory approval is a vital component in that process.

It would certainly be encouraging if, as part of the review process, the Government and PRA reconsidered their position on the creation of a regulated role of “Insurance Risk Manager” as a way of removing some of the regulatory burden from the PRA. This was something that was suggested during the original consultation process as a way of speeding up authorisations and one that the industry still firmly believes has real value. Hopefully the PRA will listen carefully to industry feedback and will identify areas where enhancements can be made and where there can be a streamlining of the process.

Growing the cake

However, what was clear from the outset was that if London is to become a world leading ILS market, we needed to bring something new and not simply be another jurisdiction for collateralising property catastrophe risks. We must become a leading innovator in the development of ILS vehicles to successfully participate in this burgeoning form of risk migration.

So, it was terrific news that in early 2019, the UK broke new ground with the first-ever ILS contract to cover terrorism risk exclusively. This differentiated London from other ILS markets across the world and opens the door to further innovation and opportunities for the UK to find its niche. Cyber, terrorism and political risk are all lines of business that are written on an unrivalled scale in the London market and it is ideally positioned to develop ILS coverages for these. In addition, we have significant expertise in new technologies and modelling techniques to help quantify and price them.

Size of the prize

If we are to find our niche and continue to innovate in this space, we need an environment and authorisation process that enables us to do so.  There are so many opportunities for us to become a force to be reckoned with and to build on the deals that have already been completed in the market. The size of the prize is enormous. To put it into perspective, there have been four deals completed in the UK representing about £1 billion of capacity out of the total £88 billion mentioned earlier. The interesting question is how the UK now develops the ‘scale & scope’ for risk transfer into the capital markets and will Lloyd’s will embrace ILS in its future plans?