During a track at the IFoA Asia Conference 2018 last week, a speaker laid out a “future state” vision that included access to insurance-linked securities (ILS)—or at least some version of ILS—for retail investors. I’ve heard this notion raised many times over the past decade, but aside from some isolated examples, it really hasn’t come to pass yet—at least not with scale.
Typically, the reason given involves the nature of the risk as well as the importance of investor sophistication. Without calling the validity of this view into question, I still see a broader challenge in play: available capital.
The extension of the ILS market to the retail investor market would have to be for a reason. And the only significant purpose for such a development would be to access additional capacity. Of course, there’s been no shortage of discussion about “excess capacity in the reinsurance industry”—an issue that’s spanned a period of time that includes:
- the global financial crisis of 2008
- 2011’s significant catastrophe losses
- Hurricanes Harvey, Irma, and Maria in the second half of 2017
And throughout this time, access to sufficient capacity has not been a problem.
Now, let’s assume an event (or series of events) occurs that’s big enough to cause a capacity crunch. Would that trigger the need for retail investor capital to flow into the market?
Before we turn to the individual investor, it helps to remember there’s still a $1 trillion buffer. That’s roughly the amount of global pension fund assets that could be allocated to the ILS sector—a sector that currently stands at around $90 billion. The potential $1 trillion in capacity is large even compared with the global reinsurance industry as a whole, which suggests that retail investor engagement is a solution in search of a problem. For now, our industry’s priority should be to cultivate the risk that could ultimately be served by the $1 trillion sitting on the sidelines as well as capital from other sources (such as, eventually, retail investors).