Buyers ‘foolish to shun ILS’

The insurance-linked securities (ILS) market is largely in a good place but the market must accept that there is nothing ‘alternative’ about ILS any more—it’s here to stay, and a part of the furniture, Mark Hvidsten, deputy chairman at Willis Re, told PCI Today.

Hvidsten acknowledges that the losses of 2017 raised some concerns about the potential for collateral to be trapped while losses were being calculated. Some ILS players also had to deal with a subsequent deterioration in their loss estimates, which they had to revise.

However, he added, that in the scheme of things, these are technicalities and there was never any doubt of claims being paid—which is the most important thing.

Hvidsten argued that ILS capital is no longer competing with traditional capital—instead, it complements it. He added that buyers must now use a blend of both forms of capital to optimise their risk transfer strategies.

“People buy big catastrophe programmes and it would be foolish of them not to consider maximising their mix between the ILS markets and the conventional ones—some markets are better at one thing and others better at another,” he said.

“The ILS markets do have a lower cost of capital, so all things being equal, they can charge a price that’s lower. On the other hand, they don’t have the diversification that re/insurers do, so that plays against them.

“Equally, reinsurers can provide reinstatements easily; for ILS funds, it is not as simple because of the collateral. There are swings and roundabouts, it is about getting the right mix.”

He added that there is a place for each on any programme. “It’s less a question of competing now,” he said.

“There are parts of a programme where the ILS people are generally better, and there are parts where conventional markets are better. There is also a middle ground where people co-exist.”

Hvidsten believes the ILS market proved itself after the 2017 natural catastrophes, pointing out that investors largely “didn’t bat an eyelash” at the events of the year and reloaded capital in response.

He added there is a growing interest in expanding ILS capital beyond property catastrophe risks, and that it will be interesting to see how this plays out over the next few years.

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