World Bank mulls famine ILS

The World Bank is working on a new form of insurance-linked securities (ILS) that could transfer the risk of famine into the capital markets, Michael Bennett, head of derivatives and structured finance in the treasury department of the World Bank, told delegates at Munich Re’s annual roundtable discussion in Monte Carlo covering the ILS markets.

Bennett admitted that famine is a complex issue but it is one of several esoteric areas of risk the World Bank is looking at in relation to ILS risk transfer.

“We have transferred pandemic risk into the capital markets before so we are looking at whether famine risk is insurable. We are also working with many countries on more standard cat risks, but in vulnerable areas where these risks have not been insured before,” he added.

Bennett was joined on the panel by Christopher Campbell, analyst, KBW; John Modin, managing director of Insurance Solutions, Citigroup; Guy Van Hecke, head of group reinsurance, AXA Global Re; and Chin Liu, managing director, Mundi Pioneer.

Two members of Munich Re’s board of management also participated: Peter Röder and Andreas Müller.

Müller asked the panellists if the industry had passed the stress tests of 2017.

Campbell argued that, from an investor’s perspective, the reaction to the losses proved that reinsurance had lost price leadership in the market.

“The typical play of large cats leading to price hardening did not occur,” he said. “The traditional reinsurance model in property cat is broken.”

Modin noted that one of the big surprises had been some of the other lines that were hit as a result of flood risk. Plus, the loss adjustment expenses had been higher than expected, with claims escalating.

Bennett noted that he had always been told prices would rise after a big loss. “But we did not see that.”

Röder stressed that in what is now such a commoditised market for property cat risk, no-one can have price leadership.

“We were disappointed with rate increases, but it is what it is and follows simple supply-demand logic,” he said.

Hecke agreed but if an event were bigger and hit reinsurers’ capital, there could be a different outcome. “The cycle could then come back,” he said.