Insurance-linked securities: Embracing catastrophic risks

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Insurance-linked securities (ILS) are an asset class based upon insurance events. They provide an element of diversity to portfolios. Put simply, a market collapse is unlikely to be correlated to a natural disaster.

Key points

  • Insurance-linked securities can be an attractive investment as they are uncorrelated with other assets
  • Recent hurricanes in the US have increased the focus on ILS
  • In some jurisdictions, insurance-based solutions are dependent on insurance penetration
  • There is no reason why ILS cannot protect governments as well as companies and individuals

Some private ILS lines could see rate increases of 30% or more: Twelve Capital

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The insurance-linked securities (ILS) market responded well to recent intense pressure from third-quarter catastrophe events, and there’s an opportunity for ILS players to take advantage of premium increases of up to 30% or higher, according to insurance and reinsurance linked investment specialist manager, Twelve Capital.

In a recent research note on the active 2017 hurricane season, Twelve Capital has said that the private ILS market is likely to experience premium increases of between 10% to 30%, dependent on the line of business, with some niche areas of the private ILS sector seeing rates increase even higher.

Риски российской экономики оценили в квадриллион рублей (With more then 50% wear of infrastructure within Russian economy, Expert RA estimates underinsurance exposure of almost USD 17 trillion)

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Российская экономика с ее ветхой инфраструктурой подвержена существенным рискам, при этом в отличие от развитых стран в РФ они практически никак не застрахованы. В результате в случае форс-мажорных обстоятельств люди и бизнес несут безвозвратные потери.

К такому выводу приходят аналитики рейтингового агентства “Эксперт РА” в исследовании “Будущее страхового рынка: российская карта рисков”.

Общий объем незастрахованных рисков в целом по экономике превышает квадриллион рублей, говорит президент “Эксперт РА” Дмитрий Гришанков.

“Informed” ILS investors willing to increase commitments: Noonan, Validus

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Insurance-linked securities (ILS) investors are “informed” and their lack of naivety suggests an expectation of higher rates in 2018, and many investors in the space have additional appetite despite recent catastrophe events, according to Ed Noonan, Chairman of the Board and Chief Executive Officer (CEO) of Validus Holdings.

Trapped reinsurance and retrocession collateral has become a hot industry topic in the aftermath of third-quarter catastrophe losses, which is expected to be the costliest quarter on record for re/insured losses from natural catastrophe events, and the first major test for the ILS sector.

InsuResilience commitments made at COP23 climate meeting

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New commitments have been made to the InsuResilience initiative, that seeks to provide direct or indirect insurance coverage to an extra 400 million of the world’s most vulnerable people by 2020, with the German government committing US $125 million to help expand the initiatives remit.

The initiative seeks to bring climate insurance and risk transfer solutions to many more of the world’s poorest, most vulnerable and at-risk communities.

Record -9.04% decline for ILS funds in September 2017: ILS Advisors

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The insurance-linked securities (ILS) fund market has experienced its largest ever losses in September 2017, final data from ILS Advisors index of ILS funds performances shows, with the average being a decline of -9.04%.

In total, 33 out of the 34 ILS and catastrophe bond funds tracked by the Eurekahedge ILS Advisers Index saw a negative return during the month of September 2017, as the impacts of hurricanes and earthquakes drove the entire ILS market to a decline.

Following on from a negative August, in which the average return of 34 constituent insurance and reinsurance-linked investment funds sank to -0.34% on the impact of hurricane Harvey, September has been significantly worse for ILS funds, as the impacts of hurricane Irma drove major losses and Maria further still.

Cat rates could rise 25%, but “eager” alternative capital may dampen: Willis

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Catastrophe exposed property insurance pricing is expected to rise anywhere from 10% to as much as 25%, depending on whether accounts faced losses during the recent hurricane events, but “still eager” alternative capital providers may dampen the upward pressure on rates, broker Willis Towers Watson said.

In the brokers latest Marketplace Realities report on the property & casualty market, Willis Towers Watson (WTW) said that it forecasts steep rate increases of up to 25% on catastrophe exposed property business.

We don’t believe all ILS capacity can race back in for 1/1: Maloney, Lancashire

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Speaking today, Lancashire holdings CEO Alex Maloney said that it is unlikely that all ILS capacity can race back into the market in time for the key January reinsurance renewals, but explained that his firms Kinesis vehicle will be ready to reload for any opportunities that arise.

Maloney was discussing the state of the market in the wake of the recent major catastrophe losses during the third-quarter earnings call for his firm, specialty insurance and reinsurance group Lancashire Holdings Limited.

Answering questions from analysts, Maloney said that the question over how the ILS market will react and cope with its losses, with the key January 1st reinsurance renewals ahead, “Is something we could debate for hours.”

Alternative thinking: the historic rise of ILS

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Aon Securities has published its annual ILS report: Alternative Capital Breaks New Boundaries. Paul Schultz, its chief executive, tells SIRC Today about the key developments during what has been a record year for ILS.

It has been a record year for insurance-linked securities (ILS) in several ways. In the six months to June 30, 2017, some $8.5 billion of catastrophe bonds had been issued—far higher than even the most bullish estimates at the start of the year, and exceeding any annual issuance total on record.

Paul Schultz, chief executive of Aon’s investment banking team, Aon Securities, says that even his own forecast of around $8 billion issuance for 2017, which was viewed by many at the time as optimistic, had since proved to be too conservative.

$9 billion of collateralised retro estimated blown or trapped

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Of the $29 billion of total retrocessional reinsurance capacity tracked by broker Aon, an estimated $9 billion, or 31% is collateralised and either completely blown or trapped as a result of recent catastrophe events, according to Robert Bisset, Chief Executive Officer (CEO) of Global Re Specialty, Aon Benfield.

Following the devastating effects of hurricanes Harvey, Irma and Maria on parts of the U.S. and the Caribbean, Aon Benfield executives discussed the impacts to the global reinsurance and alternative capital markets, including the retro space, which has been widely debated since the storms.