The ILS (insurance-linked securities) market has shown impressive growth since its inception, but significant future gains could prove elusive. The tools needed to transfer risk to the capital markets simply don’t exist for enough lines of business. While catastrophe indices serve the United States, Canada, and Europe, they don’t serve the rest of the world (and many lines of business). And that is limiting the potential of the ILS market.
The recent increase in indemnity-triggered transactions shows how the catastrophe bond market has evolved. Investors are becoming more comfortable with such an approach for certain types of risk, and they’re voting with their capital. Yet it isn’t a likely strategy for regions and lines of business new to the ILS sector. Another plan, therefore, is necessary — and the ILS sector is beginning to demand it.
The need for industry loss indices around the world is palpable. Beyond the risk transfer implications, primary insurer claims departments would benefit significantly from PCS®-style services for new regions and lines of business. They would gain a consistent catastrophe definition, be able to benchmark average claim payments, and improve loss reserving.
For the risk transfer space, regional catastrophe loss indices would facilitate reinsurance transactions, support retrocession, and make the capital markets more accessible. In fact, the adoption of a regional index would be the first step in opening the capital markets, providing an independent standard for executing transactions. As the local insurance industry accumulates experience with the capital markets, it will gain access to a wider range of alternatives, including indemnity-triggered deals. The index, however, is the first step.
That also holds true for other lines of business. PCS has learned from extensive conversations with the market about the need for a global energy and marine index, the absence of which has not only hampered the existing market but kept it from growing.
ILS sector growth has been significant — and more opportunity remains. Through innovation in regional and line-of-business indices, such as energy and marine, cedents would gain access to capital by offering investors a wider range of risks.