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Insurance-linked securities (ILS) are set to play a meaningful role within global risk markets, as insurance and reinsurance risk and exposure expand, according to Moses Ojeisekhoba, CEO of Reinsurance at Swiss Re.
Speaking to Artemis and our sister publication Reinsurance News in an interview, Ojeisekhoba said that while leveraging ILS markets directly at Swiss Re is not always a priority for the company, he does acknowledge that ILS is here to stay and has a valuable role to play.
“As a market leader we are constantly pushing the boundaries. For example, more than a decade ago, we became an ILS leader, and since then we developed the strategic concept of large, transformative transactions. In all these areas we see our competitors catching up and so we need to keep innovating,” Ojeisekhoba said.
While Swiss Re undoubtably feels the competitive effects of ILS market growth, it remains relatively limited in terms of where in the market the firm faces off against ILS and collateralised reinsurance players.
Ojeisekhoba explained, “In terms of product lines, property nat cat is certainly one of the more competitive areas as capital can flow more easily through ILS funds relying on third party nat cat modelling software.”
He went on to explain that as a re/insurer, Swiss Re itself does not need to reply on ILS as a capital source to support its business model.
Given Swiss Re’s broad and globally diversified business model, strong balance-sheet capital and ability to play across the risk spectrum and along the entire market value-chain, the company has a selective approach to working with ILS.
Swiss Re prefers to retain the risk premium it underwrites as much as possible, it seems, while working to support ILS transactions where it makes sense to do so and the revenue earned is deemed attractive.
The company does have a sidecar in operation, the Sector Re vehicle, which has fluctuated in size over recent years, but remains a relatively small and often opportunistic use of capital markets backed retrocession support for Swiss Re.
“Our key focus has always been on profitable gross underwriting and this will continue to be the case. So we do not rely heavily on alternative and capital markets to hedge exposures. When you also look at our solvency ratios, you see that we do not really need to be reliant on this form of capital to pursue our objectives,” Ojeisekhoba commented.
Further explaining, “Ultimately, we do not expect that this capital comes for free – they expect to make a return, so we are careful to pass on such returns only when we deem it essential to our strategy.”
Like other major re/insurers though, the area where Ojeisekhoba does see a role for ILS to play, alongside Swiss Re, is in helping to expand insurance penetration generally.
With Swiss Re heavily focused on developing and growing new risk pools and sources of risk premium, the company acknowledges that ILS can here be a useful tool and hence Ojeisekhoba sees potential for growth.
“I fully expect the alternative and capital markets interest and participation in reinsurance to remain and perhaps even continue to grow. If you look over the long term, risk and exposure is expected to grow, capital will be required to provide capacity that society needs, and this segment of the market plays a meaningful role,” he explained.
Swiss Re CEO Christian Mumenthaler expressed a similar view recently, when he said that insurance-linked securities (ILS) are a necessary force within insurance and reinsurance, as the depth or the global capital markets are needed to support the underwriting of insurance in peak catastrophe zones.
Even the very largest of traditional insurance and reinsurance firms recognise that ILS can be a source of capacity that will work alongside them as they seek to develop new markets and expand existing ones.
With opportunity abounding for companies able to target the creation of these new risk pools, or to expand existing but underserved ones, it makes sense for the largest re/insurers to strike a more conciliatory tone regarding the use of ILS capacity.
However, don’t expect this to lead to burgeoning new opportunities from following on the heels of the likes of Swiss Re, as these major players tend to prefer to go it alone as much as they can.
“Exposure is growing across many dimensions that are irreversible – from urbanization, to ageing societies, to increasing wealth, to technology improving access to insurance products. So there will be more need for our product both from the standpoint of capital/capacity but also from the standpoint of knowledge and resulting innovation,” commented Ojeisekhoba.
The expansion of risk and exposure is accelerating fast though and it seems likely that this will drive opportunities for ILS firms nonetheless, as so many are now sophisticated enough underwriters in their own right to access new risk pools without the support of major traditional market players.
ILS is well positioned to take whatever opportunities do come its way and to make its role increasingly meaningful, as the risk and exposure landscape continues to widen.