The head of the financial services operations for the World Economic Forum has warned there is no easy fix to the challenges which are acting as a brake to the growth of the insurance linked securities (ILS) market.
Giancarlo Bruno, Director, Financial Services at the World Economic Forum, was speaking at the London launch of a study into the ILS sector and warned that despite the growth and progress made in the most difficult of economic conditions there remained core issues which had to be addressed if ILS was to establish itself as a significant part of the risk transfer and mitigation toolkit for major financial entities.
“Today’s report points to future opportunities for all stakeholders in the ILS market,” he said. “The report shows that there are some fundamental issues to be addressed if these opportunities are to be seized to their fullest potential, and that these will not be simple, fast or easy to overcome. In order to maintain the growth of the insurance risk market, concerted action will be required from market participants over many years ahead.
“Those players who have so far driven its growth are already engaged in taking steps to address areas such as data availability and quality, and this momentum needs to continue.”
The report, Convergence of Insurance and Capital Markets explores the growth of the ILS market and highlights potential next steps needed to continue its development and to further encourage investors’ strong appetite for catastrophe bonds and other forms of insurance-linked products.
The study found the notional value of outstanding ILS increased from $26bn in 2006 to $39bn by the end of last year and there remain predictions of “robust” growth in the years ahead despite the dire economic outlook.
Dieter Wemmer, Chief Financial Officer of Zurich Financial Services – the project chair and one of the companies co-sponsoring the report – said: “Driven by a need to finance growth, manage capital and transfer risks related to extreme events such as hurricanes, earthquakes and pandemics, (re)insurers are increasingly turning to capital market solutions. Investors find insurance-linked products attractive because they typically provide robust yields and represent an opportunity for risk diversification – particularly important in the current financial climate.”
The challenge remains to widen the customer base for ILS products away from the specialist investment markets which currently look to acquire the bulk of the investments.
Transparency is seen as a key to attracting new investors and while customised structures will continue to have their place, cat bond transactions and the documentation of insurance products must become more standardised, in terms of contracts, deal type and data provided, adds the report.
