15 years after its inception, the market for insurance-linked securities (ILS) is poised for continued growth as re/insurers, governments and corporations continue to access capital market solutions to finance growth, manage their capital and transfer risks related to natural catastrophes and other extreme events, according to Swiss Re’s latest publication.
Aimed at companies wishing to transfer peak risks as well as qualified institutional investors seeking to invest in ILS, Swiss Re’s “The fundamentals of insurance-linked securities” offers a comprehensive overview of the structures and features of this growing asset class, together with a summary of the benefits of ILS from the perspectives of both the sponsor and the investor.
Swiss Re, a pioneer in the development of the ILS sector, has sponsored close to USD 10 billion in transactions for its own protection. Through its appropriately licensed entities, Swiss Re has underwritten more than USD 20 billion of both life and non-life risk including third-party transactions. As a leader in the market, Swiss Re has supported numerous key innovations.
Among notable recent developments, Swiss Re was a founding shareholder in PERILS AG, which created the European Windstorm Index. PERILS has benefitted the European re/insurance and ILS markets by improving the transparency of industry losses. Standardised, consistent and timely market data has facilitated recent growth in European cat bonds. With another groundbreaking innovation in the life space, Swiss Re has developed the first Longevity Divergence Index, which enabled the first longevity trend securitisation through the Kortis transaction.
“Insurance Linked Securities are an integral component of our product offering to clients and we are starting to see increasing demand for non-US peak risks,” says Matthias Weber, Head of Property & Specialty at Swiss Re. “By offering ILS, Swiss Re can combine its strong origination and distribution platforms with its ability to assume basis risk and tail risk.”
Sponsors of ILS transactions value the fully collateralised, multi-year capacity of an alternative market. Swiss Re’s robust appetite to assume basis and execution risks, make it particularly well-equipped to help sponsors access the broader capital markets. In addition to structuring and placing a transaction, Swiss Re can act as an intermediary between the sponsor and the special purpose vehicle (SPV) issuing the bonds, offering sponsors a traditional reinsurance contract covering their complex, heterogeneous risks, reducing basis risk and enabling the efficient transfer of homogeneous, tradable and transparent risks to the capital markets.
ILS offer re/insurers, governments or corporations the ability to transfer their peak risks and thus allow them to complement and diversify their reinsurance protection. ILS form an integral component in many sponsors’ risk transfer programmes and there is a constant pipeline of ILS issuance supported by a committed investor base.
ILS investors, a global group of institutional money managers, dedicated cat bond funds as well as multi-strategy hedge funds, continue to see relative value in a diversifying asset class with superior returns. The increased utilisation of parametric or index-based triggers improves transparency for investors.
In the secondary market, investors also appreciate the substantial liquidity support Swiss Re Capital Markets offers as a broker dealer. During the recent financial crisis, some hedge funds decided to de-leverage and many of these investors found strong prices for their ILS positions.
“The ILS market is strong and poised for continued growth,” says Martin Bisping, Head of Non-Life Risk Transformation at Swiss Re. “Our investor and sponsor base is made up of stable long-term partners and we consistently generate new interest in the sector. We believe this combination will lead to a continuation of robust ILS market growth.”
