A September 2017 Time magazine cover was of the NOAA Satellite map showing Hurricane Harvey entitled: THE STORMS KEEP GETTING STRONGER. AND SO DO WE.
In many ways, this cover encapsulated both the growing strength of catastrophic storms, as well as, the resilience of the American people exposed to them. This brings to mind the Latin phrase, Succisa Virescit (roughly translated): “When cut down, grow back stronger.”
Given Venbrook’s position in the risk transfer industry, typically our clients need us most when they have been cut down. We take great pride helping our clients grow back stronger, should a catastrophe, natural or otherwise, strike. Moreover, we are forward thinking, developing solutions where there are current, unmet needs or where there will be needs.
In a 2008 study, the US Geological Survey found there's a greater than 99% chance of a 6.7 magnitude quake or larger hitting the California area over the next 30 years. The Insurance Linked Security market can and will provide a solution for catastrophic risk while re-structuring the way risk is transferred throughout the finance industry.
Insurance Linked Securities – Attractive Alternative Investment Vehicle
The Insurance Linked Securities (ILS) market is evolving and will be the marketplace for risk trade in the near future. In essence, it is taking pools of risk (now mostly Property) bonding the values, and selling them as securities (Cat Bonds). If pre-set parameters are met, the bond is triggered with little or no adjustments (Parametric trigger vs. claims adjusting). Large investors are frothing to fuel the ILS market as they struggle for the historical returns they have achieved in the past and are now looking for alternative investment vehicles.
- Hedge Funds, Private Equity, and fund managers are encouraged by the traditionally high returns enjoyed by the insurance industry.
- ILS provides a much more efficient trade – getting more of the investors’ dollar to the insured bringing the trade back to its true derivative play.
- Non-correlated component of the ILS market is extremely attractive for fund managers looking for diversity and non-systemic risk.
- Provides critical differentiation for capital providers trying to compete.
- Parametric Bond allows for contract specificity and pre-negotiated triggers negating the need for arduous claim adjusting.
- Burdensome and costly due diligence, modeling, and underwriting already honed by the traditional insurance market.
Insurance Linked Securities – Attractive Alternative Risk Management Solution
In the macro, the insurance industry is also “cut down” when absorbing the unexpected losses associated with catastrophic ‘acts of God’. However, this cycle is very healthy for the industry as its breeds innovation and efficiency. Catastrophic losses like what we recently experienced expose gaps in coverage, insufficient policy language in interrelated events such as wind, wildfire and flood, and inefficient claims handling post loss.
To solve the above structural weaknesses, the Insurance Linked Security market came into its own, in part, to a surge of major hurricanes in 2004 and 2005 as well as the Northridge Earthquake in CA, providing a powerful new tool for transferring catastrophe risk.
- Hurricane Andrew exposed huge weaknesses in modeling (and therefore reserving) because the industry was embarrassingly underfunded to write the exposures and thus paid the price dearly. https://www.iii.org/sites/default/files/paper_HurricaneAndrew_final.pdf
- Then the Northridge quake made other issues apparent. It exposed a gap in coverage and a critical question: “Will for-profit companies be willing to underwrite such risk under the current structure of the trade?”
http://forms2.rms.com/rs/729-DJX-565/images/eq_northridge_ca_eq.pdf
At Venbrook, our clients are extremely interested in alternatives to the traditional insurance market. Ultimately, they want a less expensive and less complicated way to handle their risk management. The ILS market provides both:
- Via a more efficient trade premiums significantly drop. We have already witnessed ILS’s impact on driving prices down in the reinsurance space, forever changing the industry.
- ILS allows the claimant faster recovery with much less friction. ILS contracts are typically written as a Parametric Bond meaning if certain pre-agreed parameters are met, the bond is triggered, and recovery is immediate.
Succissa Virescit is built into the fabric of this nation and its business owners. The optimism and motivation to come back stronger is often the result of reliance and trust. Currently, there is a massive need where the traditional insurance industry has not been able to provide that reliance and trust.
In conclusion, let’s re-visit the US Geological Survey from 2008 to make the point for ILS. Given over 93% of insurable values in Southern California are NOT insured for Earthquake, we certainly see a need and an imminent one!
For more insights into ILS, Executive Liability, Cybersecurity, and other areas impacting the insurance industry today, please follow or contact me directly on LinkedIn.
Kevin Mahoney | Senior Vice President | kmahoney@venbrook.com | 949-433-5205
