“Convergence between the capital and insurance markets is gaining pace and Lloyd’s insurers are at the forefront of developments,” notes an article on the Lloyd’s web site (www.lloyds.com).
The latest sign of convergence in the sector is a deal announced by Lloyd’s insurer Amlin plc. It recently formed an investment management partnership with former Swiss Re executives John Wells and Luca Albertini that specializes in traded insurance risk. Wells will be chairman of the new firm and Albertini its chief executive.
“The Insurance Linked Securities (ILS) market has grown strongly in the last few years and is fast becoming an established sector within the capital markets,” said Lloyd’s. “Insurers and reinsurers increasingly participate as both buyers and sellers.
“For insurers, the capital markets have provided new sources of capital and new instruments at a time when capital and risk management have become crucially important. For investors, insurance related assets have provided a new asset class with a good risk return profile – but with very low correlation to traditional asset classes such as equity, fixed income and real estate.”
Lloyd’s noted that the outstanding catastrophe bond risk capital reached $13.8 billion at the end of 2007, a 63 percent increase over the previously record-setting 2006 year-end total of $8.5 billion. Catastrophe bond risk principal now accounts for 8 percent of property limits worldwide and 12 percent on a US-only basis.
The new Amlin venture, which is subject to FSA authorization, will manage funds focused in traded insurance risk. Amlin intends to be an active player in the ILS market, both to enhance its capital and risk management capabilities, and to generate returns from the growth and high margins available in the business.
The company is the first such venture to be backed by a Lloyd’s insurer, whose underwriting expertise significantly strengthens the fund offering. Amlin will also be an investor in the fund.
“Funds don’t usually have this kind of expertise available to them. They don’t have the same kind of access to underwriters as we do. It means we can get good feedback on sellers’ profiles,” Albertini explained. “This is important to investors as we are seeing a clear tendency towards indemnity type structures [where the trigger is loss related], as opposed to parametric ILS deals [where the trigger is weather related].”
He added that the ILS sector is growing on the property side. He also sees opportunities in the industry loss warranty (ILW) market, contracts that are triggered by pre-determined losses to the insurance industry in excess of specified amounts.
Moreover Albertini expects to see more activity on the life ILS side, especially in Europe, as life assurers prepare for the proposed Solvency II regulations. As a result, he said his firm wants to launch two funds this year of at least $100 million each and one of the funds will have an element of life ILS in it.
Another Lloyd’s insurer, Brit Insurance, “has started trading in insurance-linked derivatives on the Insurance Futures Exchange Services platform (IFEX),” said the article. Brit is the first major insurer in the London market to trade on IFEX, which is part of Climate Exchange Plc and is a liquid electronic insurance exchange. IFEX Event Linked Futures are listed on the Chicago Climate Futures Exchange (CCFE).
Brit chief executive, Dane Douetil, indicated that the move has enhanced Brit’s ability to manage its clients’ risk and its own shareholders’ capital effectively. “The increasing liquidity in this market is encouraging and the trading of event-linked futures provides additional flexibility in our portfolio management,” he commented.
IFEX event-linked futures (ELFs) are exchange traded futures contracts. They are modeled on industry loss warranty reinsurance contracts.
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