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Insurnce Linked Securities June 2012

Insurnce Linked Securities June 2012

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Published by Tom Johansmeyer
This is a great white paper by PwC on developments and trends in the global catastrophe bond and insurance-linked securities markets.
This is a great white paper by PwC on developments and trends in the global catastrophe bond and insurance-linked securities markets.

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Published by: Tom Johansmeyer on Oct 25, 2012
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07/07/2013

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Unlocking the potential of ILS
 www.pwc.com/bermuda
 Assessing the potential of insurance linked securities(ILS) and overcoming the barriers to convergencewithin the ILS market
 
Welcome to
Unlocking the full potentialof ILS
, a report examining the prospectsfor insurance-linked securities (ILS)as the reinsurance and capital marketscontinue to converge, and how sponsorsand investors can take advantage of thedevelopments ahead.In the less than 20 years since the launch
of the rst insurance-linked securitisation
the ILS market has grown to the point where it now provides 14% of globalcatastrophe reinsurance capacity andin particular a far more substantialpercentage of property catastrophereinsurers. As reinsurance has had around700 years to develop and mature, ILS’
ability to capture such a signicant share
of the risk transfer market in such a shortspace of time is all the more remarkable.But while ILS has cemented its place as acomplementary alternative to reinsurance,it still has a long way to go before it canrealise its full potential. The interplay between global economic developmentand mounting catastrophe risk provides atelling indicator of just how valuable ILScould become.Natural catastrophes are becoming morefrequent and severe. Few believe that thisthreat will recede. In turn, the value of theassets at risk from this climatic instability is soaring as growth in the emergingmarkets accelerates. The estimated $15
billion claims from the oods in Thailand
in 2011 provided a sharp wake-up call on just how much the global risk landscapehas and will continue to change.ILS could play a crucial role in helpingto manage these risks, simplifying risk transfer, bringing in much needed lossabsorbing capacity and providing an
efcient way to match risk, capital and
reward in different parts of the world. Yetas we explore in this report, ILS will needto remove a number of barriers beforeit can reach its potential. In particular,sponsors have to overcome the warinessof an asset class that is seen by many investors as opaque and uncertain, muchin the same way as they view traditionalreinsurance. The key to this is being ableto cut through the complexity of ILS andforge a better understanding of how thestructures work, the nature of the risk 
prole and how this matches up against
the potential rewards.Once market participants are able to tacklethese challenges, we could begin to seethe critical mass of trading that wouldmove ILS out from its niche and into themainstream.These innovators and fast-followersinclude investment banks, specialist ILS vehicles and new capital providers fromthe emerging markets.
We hope that you nd this report
interesting and useful. If you would like todiscuss any of the issues raised please feelfree to get in touch with us (our contactdetails can be found on page 12).
Global catastrophereinsurance capacity is provided through ILS
Source: PwC Analysis
14%
 Foreword
1 In 1994, HannoverRe launched KOVER, whichis commonly 
referred toas the rst securitisation ofnatural catastrophe
risks2 The social, technological, environmental, economic, andpolitical dynamics that are transforming the risk landscapeand insurance and reinsurance sectors are explored in
 Insurance2020: Turningchangeinto opportunity 
, publishedby PwC, January 2012
3 AM Best brieng, 09.02.12
 Arthur Wightman
Partner, Bermuda Insurance Leader
 Achim Bauer
 Partner, UK Insurance Strategy Consulting Leader
 
 ILS comes into its own
The development of ILS from its beginningsin the 1990s is a striking story of growth andinnovation. Each year has seen the launch of new and adapted products as sponsors (risk 
transferors) seek to rene ILS structures and
meet changing market demands. As Figure 1 highlights, ILS has increasedrisk transfer capacity for insurers and theirclients. A particular advantage is thatILS capacity tends to be less pro-cyclicalthan traditional reinsurance, which oftencontracts in the aftermath of a major loss
event and can be difcult to secure at the
right price when insurers need it most.In turn, ILS offers acquirers an opportunity to invest in instruments that are largely uncorrelated with other assets andmacroeconomic movements, an attributethat is especially valued in the wake of 
the nancial crisis. A particular attraction
is being able to invest in pure insurancerisk. This cuts out the surrounding risksof investing in a reinsurance company,notably the market risk in its share value.By investing in pure insurance risk, ILSinvestors are spared the challenge of  valuing what are often complex and highly 
diversied reinsurance businesses – thedifculties are reected in the fact that
many traditional reinsurers trade at adiscount to book value despite their strongperformance in recent years.Figure 2 charts the development of what isnow a reasonably liquid catastrophe bondmarket. ILS has expanded to cover risks thathad previously been deemed ‘uninsurable’.Life securitisation may have been largely put
on hold for now because of the difculties
of securing the necessary guarantors, butthe underlying need to release funds fornew business remains and renewed activity is expected in the future. The arrival of theBermuda ‘Class of 2011’ (this time in theform of specialist investment managers)highlights the continued interest andinvestment in targeted areas of the ILSmarket. Yet, despite its growth, ILS is stilla niche market primarily attracting nicheinvestors, with the $15 billion in tradedassets being dwarfed by the value of traditional reinsurance.So where does ILS go from here? Overthe past 18 months, we have beendeveloping our Insurance 2020 analysis,
1
 which explores the mega trends that aretransforming the global insurance andreinsurance markets. Insurance 2020 groupsthe main drivers of change into a seriesof social, technological, environmental,
‘ILS is the new normal – it’s now inconceivable for reinsurance executivesand sponsors to not be evaluating the merits of capacity provided fromalternative capital sources.’ – Reinsurance CEO
SponsorInvesto
‘Uninsurable’ risksmanagedDirect investment intoinsuranceMulti-year solutionsaddress seasonal or cyclical issuesUncorrelated assetsCounterpoint tocost and capacitylimitations
Risk diversication
Counterparty
diversication
High yieldsNew capital sourcesand improved capitalmanagementImproved optimisationof regulatory reserves
Figure 1 ILS advantages
 
IssuedOutstanding
Figure 2 Catastrophe Bond Market - 2001 to 2011
20151050
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: PwC Analysis
The drivers that are reshaping the reinsurance sector and wider global economy open up hugepotential for ILS
2 Unlocking the potential of ILS — 2012
1 Insurance 2020, PwC, January 2012(foracopy gotowww.pwc.com/insurance)

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