Navigating the Spectrum of ILS Alternatives

Two desires have characterized the insurance-linked securities (ILS) market for years. One is the ability to construct highly customized covers that directly address a cedent’s risk-transfer needs in the capital markets space. The other is the prospect of real-time risk management, which requires a high degree of liquidity and a robust secondary market. The market’s propensity for innovation has led to significant progress on both fronts. Of course, where innovation is concerned, the successful conclusion of one effort almost always leads to the start of the next one.

In the traditional catastrophe bond market, stakeholders have made impressive progress in broadening the spectrum of cedent alternatives. Sponsors have raised more than $4.4 billion so far this year (as of August 31, 2015) across 19 transactions. While this is down from the same period last year, the year-to-date result is still strong and speaks to the strategic importance of this market. And the concentrations of particular types of activity show that catastrophe bonds are finding specific roles that serve cedents well — especially seasoned sponsors and those in the publicly managed entity space.

Highly customized transactions are not the exclusive domain of innovation, of course. The explosion of cat bond lite issuance activity speaks to the market’s interest in moving specific risks, managing frictional costs, and still gaining access to capital markets capacity. Use of the cat bond lite structure has more than doubled relative to full-year 2014 — and we still have three and a half months left in 2015.

The need for speed and improved cost-efficiency makes one wonder what the next step will be for this side of the ILS spectrum — perhaps renewed consideration of an exchange-traded risk product? It’s been on the market’s collective mind for years, and several attempts at a solution show that clear appetite persists.

The ILS market has seen — and benefited from — a clear commitment to innovation. Our continued efforts together as an industry will help our clients optimize risk and capital management, helping them succeed against the all-important shareholder value metric.

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