Convergence: ILS market must broaden its horizons

The ILS market must broaden the risks that it covers, according to Des Potter, managing director at GC Securities.

Speaking at Convergence 2019 Potter warned the process would have to be gradual, with the ILS market taking many small steps that would ultimately broaden the scope of the risk that it covers.

The ILS market is already broadening its horizons as it matures: Pool Re’s Baltic PCC exemplifies how ILS should bring new risks to the market, said Potter. The structure was well supported by the ILS market partly because of how well it modelled terrorism risk, he added, and its use of computational fluid dynamics to analyse possible blast zones from a terrorist event/bomb.

Potter suggested cyber insurance could learn lessons from terrorism insurance, with the two sharing similar characteristics.

Investors are increasingly looking for ILS investments that share certain key features, Potter said: risks should be clearly defined and modelled, preferably with an ability to determine the limit and duration of any liability.

Since the 2017-18 loss experience, growth in the ILS market has largely paused, noted Potter. There has been a reallocation amongst managers and investment strategies, which are shifting towards more remote risk and more liquid risks.

Alternative investment strategies represent an $8.8 trillion market, but ILS accounts for only a small fraction of that capital, said Potter. Investment mandates are currently broad, with a focus on short-tail classes with adequate risk premium, he said.