NEWS
Education can unleash the power of ILS
The use of ILS has the potential to close the protection gap, but education and collaboration will be key, say Kirill Savrassov of Phoenix CRetro, and Toby Pughe of Tenax Capital.
How can ILS conquer less-developed markets?
Developing countries have a low insurance penetration for several reasons. First, it’s a serious undercapitalisation of local markets, so there is a minimal insurance sector engagement for large natural catastrophes at the macro level (the recent Turkey earthquake and Pakistan floods are perfect examples).
Second, there are artificial barriers and heavy protectionism in certain countries, whereby the existence of national reinsurers with compulsory cessions slows down and limits access to global reinsurance markets. Third, there is a huge education gap when it comes to alternative risk transfer instruments and insurance-linked securities (ILS) products in particular.
Their understanding of risk transfer mechanisms, through no fault of their own, is limited—they don’t know what they don’t know.
On the other hand, the demand is there on the investor side. Even for the most basic of ILS instruments, such as vanilla parametric, they just need the product to come to the market. The cat bond market specifically is only so big and the larger investors have appetite for more products, especially those that provide portfolio diversification.
Where should education around ILS be targeted?
Regulators and government officials. In territories where the countries are small, an aggregated “risk community” would be beneficial. It’s good for the countries and investors, because they benefit from economies of scale. Frankly, everyone could benefit from understanding ILS more.
Even people at big banks and non-specialist asset managers don’t understand ILS that well. However, the priority should be to target politicians and the ultimate decision-makers.
Here is an interesting observation: if you put an institutional investor or asset manager, an insurer and, say, a government official dealing with large natural disasters, into one room—they will all have interest in the use of ILS products, but it will be from completely different perspectives. Systemic education is key in order to harmonise understanding.
“Everyone could benefit from understanding ILS more.”
Kirill Savrassov, Phoenix CRetro
What initiatives are under way to achieve this?
There are initiatives ranging from multilateral agencies such as the World Bank, UNDP, and regional development banks trying to increase awareness of local governments in parametric products and other alternative risk transfer options, to our Fundamentals of ILS course. So far, we are the only executive education and certification programme focusing on ILS. Since our launch in Autumn 2021 we have taught more than 80 students across 35 countries.
What is ILS’s potential?
It has big potential in emerging markets. For too long, poor countries become poorer through no fault of their own. If they understood risk transfer better, and had people advising them, at least some of this risk could be transferred away.
Public and private markets must collaborate for it to be effective. Governments need to amend legislation to make the purchase of insurance compulsory and/or allocate a fixed amount to disaster prevention and recovery.
If we introduced a scheme of “do these measures and we will reduce the rate on line you pay each year” it opens up a whole new portion of the market, not just for the buyer of insurance but also for environmental, social and corporate governance (ESG)-type investors.
“Public and private markets must collaborate for it to be effective.”
Toby Pughe, Tenax Capital
How can ILS help less-developed nations?
Regulators and insurers in many developing countries think that ILS is extremely complex. However, this comes from a lack of understanding. With a proper educational effort, the introduction of ILS and alternative risk transfer products could speed up the closure of a growing protection gap very efficiently.
The involvement of influential stakeholders in large projects can be beneficial. As an example: developing transborder transport corridors of the Chinese Belt & Road Initiative (BRI) could stimulate transit countries to introduce sovereign-level risk transfer solutions. In many cases ILS with its unique features can be the only viable way to protect vital transport infrastructure there.
After leaving China, at least three core transport corridors of the BRI are passing through one of the most earthquake-exposed territories in the world.
What is your goal in this sphere?
To continue to educate investors and insureds on the advantages of risk transfer. It’s a win-win situation for all involved. ILS investors get much-needed diversification and vulnerable insureds can transfer risk away.
The added bonus is that investors often like parametric products because of their transparency, and these are better suited for emerging market countries where historical claims/underwriting data is likely to be sparse.
Main image: Shutterstock / Chinnapong