ILS & LOCAL Insurance markets
Unique features for local insurers
Insurance-Linked Securities present a number of unique opportunities that are ideal for local and regional players. They allow participants to overcome issues around ratings and protectionism barriers, while giving them access to prime international markets
Equal access to reinsurance markets
Ever wanted to become a reinsurer for Lloyd's syndicates or top global industry players?
By use of ILS instruments, like Collateral Trust arrangements, local insurers can overcome poor rating and protectionism issues and effectively become an equal player in global reinsurance markets. They can participate in traditional reinsurance contracts, providing indemnity cover for a buyer’s losses, across a broad range of perils. The only requirement is to pledge cash collateral or provide a standby Letter of Credit confirmed by the approved bank to back their liabilities, hence the name.
These programs, which protect a reinsurer’s peak exposure to major catastrophes, are relatively simple instruments. They carry an Ultimate Net Loss (UNL) trigger; have a typical maturity period of one year, and premiums are paid up-front or bi-annually.
Several articles covering the topic of collateralized reinsurance.
ILW INDUSTRY LOSS WARRANTIES
An instrument on the edge of insurance
An industry loss warranty, known as industry loss warranties or ILW’s, is a form of reinsurance or derivative contract through which a company (often an insurer) can gain coverage based on the total insured loss experienced by the industry rather than their own losses from a specified event. The contracts have a specified limit which denotes the amount of compensation the buyer receives if the industry loss warranty is triggered.
Just like Catastrophe Bonds, Industry Loss Warranties are also a form of an insurance linked Security. But unlike CAT Bonds, which sprouted to life in the Mid-1990’s, Industry Loss warranties have been in use since the early 1980’s and are sometimes also referred to as Original Loss Warranties.
An Industry loss warranty is a contract that pays the reinsured for losses arising from a catastrophic event on the basis that the resulting insurance industry losses exceed a pre-determined limit, which is determined by mutually agreed independent third party agent. Few providers to name: AIR Worldwide, RMS, PERILS, etc.
Several articles covering the topic of Industry Loss Warranties.
Asset-Backed ILS for CEE countries
As mentioned in one of the recent industry articles: "While in recent years the main priority for investors was finding yield, last year the focus turned to preserving capital. One asset class that promises to deliver both good income and decorrelation from the wider financial markets is insurance-linked securities (ILS)".
In a nutshell, ILS is a way for (re-)insurers and specialist ILS Funds to hedge an unwanted risk of a really major (especially when it comes to Industry Loss Warranties), but unlikely catastrophe that could jeopardize a company's continued survival or profitability, while conscious investors are in a position to take this risk and therefore work with a pure transaction unlike insurance debt/equity, which bundles with operational, credit, market, and other issues.
As a niche specialist Phoenix CRetro with its partners pleased to present an opportunity to participate in a structured and novel framework facilitating a fruitful business flow between entities interested in pledging their Commercial Property asset(s) as security in order to invest further in private ILS transactions. We call it Asset-Backed ILS or ABILS.
This allows insurance companies in Central Europe to overcome issues with comparatively low sovereign/company ratings so to participate in the US and broader global CAT market as institutional investors with still strong risk assessment capabilities.
Through this authentic solution, a short-term cash loan with 60-80% LTV ratio is offered to assets owners against pledging their commercial properties. It is envisaged that Tier-1 bank will issue structured products which are pass-through securities reflecting the cash-flows arising from this transaction. Local bank provides bank guarantee to the issuing bank (effectively guaranteed the notes). Money raised through the sale of structured products will be places into Collateral Trust, which acts as security for participation in the entire ILS transaction.
At the same time, this offers an opportunity to specialized lenders interested in providing loan for transparent and high-quality investments characterized by low-correlation to risks corresponding to the property itself.
Important point for CEE and wider European insurance companies to mention is that when used under Solvency II regime, the ABILS concept present certain obvious advantages:
- It is a highly regulated instrument (Commission Delegated Regulation (EU) 2015/35, Revised Technical Specifications for the Solvency II valuation and Solvency Capital Requirements calculations), which is easily categorised as the Commission delegated act includes a detailed list of criteria to identify high-quality securitisation;
- Compared to direct property investments it has lower capital requirements (risk factors applicable to high-quality securitisation positions are capped at 3% while commercial property investment require 25% reserving);
- It brings liquidity improvements through attractive returns and structure stability providing soundable diversification effect as ILS are generally uncorrelated to the other asset classes, thus improving the risk profile of the investment portfolio;
- Also it has different balance sheet impacts (investment may be treated as an asset by applying the Type 2 equity stress (for buyer – Type 1 or Type 2 securitisation exposure stresses) or as a negative liability).
An increased demand for ILS investments from entities and individuals interested to enhance their utility from illiquid assets such as commercial real-estate, prompt the next stage of development for ILS industry and enables us to structure a solid investment facility benefiting all parties involved in such transaction: lenders, investors and protection buyers.
Several articles covering the topic of Asset-Backed ILS.