July 20, 2016

Asia shows significant interest in ILS, market set for steady expansion

The insurance-linked securities (ILS) sector and the use of capital market capacity within Asian insurance and reinsurance is set to increase steadily, according to speakers and attendees at last week’s inaugural Artemis ILS Asia 2016 conference in Singapore.

We held our first conference at the iconic Raffles Hotel, Singapore last Wednesday, where over 170 delegates gathered to hear leading ILS market participants discuss the potential for ILS market growth in Asia and to network with the attendees.

Artemis ILS Asia 2016

Speakers came from across the global ILS and reinsurance market, with the local market extremely well represented as well. A good mix of ceding companies, protection providers, ILS fund managers, service providers, investors and the legal or regulatory side of the marketplace were all in attendance.

Traditional reinsurance coverage is very affordable in the Asian region, but as Lixin Zeng, CEO of AlphaCat Managers Ltd. the ILS investment management arm of Bermuda-based re/insurer Validus Group, explained to the gathering at the Raffles Hotel, there will be a growing opportunity and need for the capital market’s and ILS to increase penetration within Asia.

As a result, today the Asia region is dominated by the traditional reinsurance market as the tail contribution of Asian risk is small, but in time the rapid growth of insurance penetration and economic development means this tail-risk will increase.

Lixin Zeng discussed the investor perspective on insurance-linked securities (ILS) and the growth potential in the Asian region.

“Today cedents in Asia don’t really need to bother with ILS, as it’s very affordable,” Zeng said, but in time he explained “The tail-risk of Asia risk is going to be so much bigger, that the traditional reinsurance market will have to increase premium rates to make their capital model work.”

“It is important for Asian cedents to get familiar with and to start building some relationships with ILS and capital markets, that way when the growth (in tail-risk) materialises, the ILS managers are ready to provide capital support for Asian business,” Zeng continued.

“ILS is well-positioned to support the growth,” of the Asian markets, Zeng concluded, as has been previously seen in the impact ILS has had in peak catastrophe zone markets.

Akira Takahashi, Head of Asset Management Japan, at investment banking group Credit Suisse, spoke on the fact that Japan is currently the largest market in Asia for the ILS fund managers.

“Today, ILS is recognised as one of the major asset classes in the alternative bucket,” Takahashi commented. “I think in the Japanese market today we probably have $5 or $6 billion in total (in ILS), but the reality is that this is concentrated to 5 or 6 ILS managers.”

Dr Mili Eppler, a Senior Underwriter at Credit Suisse Insurance Linked Strategies Ltd., said that diversification is important as an ILS manager, but that being able to understand and quantify the risk is vital, noting that “This can be more challenging in some parts of Asia, so we really need to work closely with modelling companies and brokers to ensure we’ve understood the risk.”

Eppler also noted the insurance protection gap issue in Asia, saying “One way we could really enable greater access to alternative capital would be to create products with, for example, parametric triggers, where you remove a lot of the uncertainty about the underlying exposures.”

Greg Wojciechowski, President & CEO of The Bermuda Stock Exchange spoke on a panel discussing the need for efficiency within ILS domiciles, explaining that the ILS market is big enough and expanding rapidly enough for other regions of the world to find their niches, in order to facilitate and play host to transactions.

“Competitions a good thing,” Wojciechowski said, adding that the way forward between domiciles looking to enter the ILS market and to help it expand might be to work together on a collaborative basis.

This would be a positive step for the Asia region, enabling them to work with mature ILS domiciles such as Bermuda and to learn from best-practice already established in the industry.

Stefan Kräuchi, Founder of ILS Advisers, an Asia-based ILS investment adviser and also manager of ILS assets, said that fully-collateralized products may be very attractive in Asia,

“Here in Asia, investors we talk to are most concerned about counterparty risk. Being able to show them that there’s not much counterparty risk in those (ILS) instruments is often a very important and appealing selling point,” Kräuchi explained.

“In Asia we see a very strong preference for liquid investments,” Kräuchi continued, explaining to attendees that the Asian institutional investor-base are attracted to fund structures such as UCITS and instruments such as the 144A catastrophe bond.

Susan Lane, Co-CEO of Tokio Solution Management Ltd, commented that both lower pricing in Asia and also structural differences such as the lack of reinstatements can hinder growth of the ILS asset class into new regions.

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Source: Artemis


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