Why educating the industry about ILS is so important

Insurance-linked securities (ILS) have become a vital part of the reinsurance industry, providing alternative capital for risk transfer, allowing investors to access insurance risks through financial markets, spread catastrophe risks and enhance market capacity. 

The key benefits of ILS are clear: greater diversification for investors, reduced reliance on traditional reinsurance and increased capacity to absorb large losses from natural disasters. 

Additionally, ILS instruments such as catastrophe bonds offer more flexible and efficient solutions for insurers, helping to stabilise pricing and provide resilience against major catastrophic events.

But does the market know enough about ILS? We asked a cross-section of re/insurance leaders their opinions about the importance of educating the market on ILS, and here’s what they said.

Henning Ludolphs, managing director, retrocessions & capital markets, Hannover Re

ILS is an important and substantial part of the worldwide reinsurance business with a strong focus on property-catastrophe risks. It is important that there are opportunities for those interested in the business to learn about the basics and also to exchange views with and to learn from experienced ILS industry practitioners. 

This will be beneficial for the industry as it broadens the expertise and thus helps the market to further grow.

Dirk Lohmann, vice chair, ILS Business Unit, Schroders Capital

Further education is necessary for protection buyers and ILS investors. Protection buyers, particularly those new to purchasing ILS products as collateralised reinsurance, may not have the systems and processes in place to support specific requirements (such as regular post-event claims reporting), highlighting the need for education and system adaptation.

“It is essential to prioritise education and thought leadership among all key stakeholders.” Justin Ward

There is a need to educate buyers on the limitations and the realistic expectations of ILS capital efficiency. Educating investors to get them comfortable with these exposures is vital to bridging the gap between the high demand for such coverage and the readiness of the market to provide it.

Justin Ward, managing director, head of capital advisory APAC, Guy Carpenter

We need to cultivate an environment that fosters understanding among regulators regarding our initiatives in the ILS space. It is essential to prioritise education and thought leadership among all key stakeholders, including government, regulators, industry associations and investors

We are intensely focused on making ILS a central part of the solution set for governments, reinsurers, insurers and corporates. We are taking initiative in educating all the stakeholders on newer tools and structures that are becoming available to manage this risk. 

Niraj Patel, head of ILS Capital Management, AXA XL

ILS provides an attractive, low-correlated return stream to investors. Education on risk characterisation, performance drivers, portfolio fit, the re/insurance cycle, and reserving would help expand the institutional investor base. Continued enhancements in modelling and pricing practices would reassure investors about ILS’s long-term prospects.

From the re/insurers’ perspective, ILS is another way to expand the capital base, for a defined period, diversify reinsurance panels, and manage exposures and aggregation of risks. For peak risks, capital markets are a good fit for risk transfer.

Better understanding and practical experience in utilising ILS protection will expand usage and ensure ILS is considered in long-term reinsurance protection strategies.

Dominick Tassone, chief underwriting officer, AM Specialty Insurance Group

It’s crucial to understand the advantages of an ILS structure—how it benefits and protects us. Does it reach the market faster? Does it align with our mission and strategy as a primary carrier? 

As the industry evolves, it is becoming younger, and many industry seasoned experts are retiring. Therefore, with this generational shift, more education is definitely needed. Expanding knowledge about ILS will be beneficial for the industry moving forward.

Andy Palmer, head of ILS Structuring EMEA & APAC, Swiss Re Capital Markets

ILS offers a different approach to transferring risk and is a positive and growing factor in our industry. However, ILS has important distinctions from traditional reinsurance, and it’s essential for cedants exploring alternative risk transfer options to understand these differences. 

ILS is a valuable part of the industry’s toolkit, providing opportunities to transfer certain types of risks and, in doing so, potentially expanding the availability of capacity. 

Christoph Oehy, chief executive officer, PERILS

New issuances of ILS structures such as cat bonds have increased significantly and these have become an important part of many large cat reinsurance programmes.

While cat bonds will continue to focus on peak perils, there is growing interest from buyers and sellers in other diversifying perils. Accurate loss data is essential to helping improve understanding of these increasingly impactful risks.

The cyber market has grown strongly, and its accumulation potential lends itself to cat bond transactions. Continuous product development and the expansion and wider sharing of cyber-related data and knowledge across the industry will be key to supporting further uptake.

To find out more about the ILS Education Programme visit ils-course.com

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