Four questions the ILS industry needs to answer

Throughout the renewal season, many questions arose about the future of the market, particularly as to accessing risk from new classes of business. Rather than peer into the crystal ball and try to see what’s coming, now is the time for the global reinsurance industry to ask hard questions about where growth will come from—and take decisive action to create solutions. For the coming year, the industry should ask—and discuss—these four questions:

1. Will publicly managed entities return? Only one catastrophe bond came to market from a publicly managed entity in 2016 (Ursa Re), following several years of significant activity from this sector. The absence of this category of sponsor clearly had an impact on the year’s overall issuance. The return of the publicly managed entity sponsor base would drive considerable year-over-year growth for the space in 2017.

2. What will gain traction? Over the past few years, we’ve seen several innovative catastrophe bonds that suggest broader issuance potential: Bosphorous Re, Panda Re, and Operational Re are among them. However, innovative transactions like these seem to come on a one-off basis. Finding scalable classes of business could provide a meaningful foundation for future catastrophe bond market expansion.

3. When will new lines of business come? Property catastrophe isn’t enough for the ILS market. Investors have always seen it as a first stop along a longer journey of access to insurance risk. So far, though, only a handful of opportunities have come from outside the property catastrophe sector (such as Operational Re). Meaningful growth requires access to new tool sets.

New index platforms should contribute to additional issuance from new classes of business.PCS is focused on specialty lines for 2017, with efforts in progress to launch a global energy and marine index. New index platforms should contribute to additional issuance from new classes of business. Solutions for cyber and terror have also been the subject of many market discussions.

4. Will blockchain make a difference? The global insurance industry was abuzz over blockchain for most of 2016. The technology provides many benefits, including a permanent (nondeletable) historical record. Early adoption has come from the industry loss warranty (ILW) community because the instruments lend themselves to the “smart contract” technology being implemented on private blockchain solutions. It will be interesting to see whether blockchain and smart contracts can reduce frictional costs sufficiently to drive growth in the use of index-triggered risk-transfer vehicles.