
Setting the stage for the ILS markets next evolution
November 10, 2016
There are many factors which have set the stage for next evolution in the Insurance-Linked Securities (ILS) market. The global capital markets seem to be in a state of uncertain equilibrium – exacerbated by several influences currently in play that will shape the future of the capital markets, for example, the U.S. election, implications of Brexit, the U.S. Federal Reserve raising interest rates, questions of a China slowdown, and negative rates in Europe to name but a few. Some of these uncertainties have echoed through the ILS market, contributing to a perception of reduced innovation.As a result, we’ve seen the overly dramatic headlines that predict the death of cat bonds and wider ILS, but the reality is that we are currently in a lull of centralized innovation. Another way of thinking about it is that the people that were responsible for market development are no longer in the seats as intermediaries – many have shifted from agent to principal, others are focused on revenues closer to core mandates. The sector therefore finds itself in need of some direction to spur innovation, which will likely have to come from within. If we as a market believe that capital will continue to look for attractive, risk-adjusted returns and if we believe that our capital structure can be re-invented or re-thought, then we need to make investments in that future – even when the payoff is not immediately obvious.To do that, we start by evaluating the profile of the alternative capital investor. The first point to make is that the investors providing capital cannot be lumped into one category – no two investors are the same, and while there are trends that can be identified, we over-simplify the world by referring to what “investors want”. The second key point is that the money entering the market has entered via sophisticated and thoughtful investors – and it is here to stay. Broker reports indicate that about 20% of the global property catastrophe market now has collateral backing itAs XL Catlin’s Mike McGavick is fond of saying, we would all rather be in an industry that is attracting capital rather than one that is losing its attractiveness to capital. Therefore, we as an industry need to continue to find investors who believe in our value proposition.
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