A capital idea
20 June 2008
Convergence between the capital and insurance markets is gaining pace and Lloyd’s insurers are at the forefront of developments.
Lloyd’s insurer Amlin plc has announced an investment management partnership with former Swiss Re executives John Wells and Luca Albertini that specialises in traded insurance risk. John Wells will be chairman of the new firm and Luca 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. 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.
At year-end 2007, catastrophe bond risk capital outstanding reached US$13.8 billion, a 63% increase over the previously record-setting 2006 year-end total of US$8.5 billion. Catastrophe bond risk principal now accounts for 8% of property limits worldwide and 12% on a US-only basis.
The new Amlin venture, which is subject to FSA authorisation, 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,” Luca Albertini said. “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].”
Mr Albertini says the ILS sector is growing on the property side and that 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.
However, he also 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, Mr Albertini says his firm wants to launch two funds this year of at least US$100 million each and one of the funds will have an element of life ILS in it.
Meanwhile, another Lloyd’s insurer, Brit Insurance, has started trading in insurance-linked derivatives on the Insurance Futures Exchange Services platform (IFEX). Brit Insurance says it is the first major insurer in the London market to trade on IFEX. IFEX 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, said 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,” Mr Douetil said.
IFEX event-linked futures (ELFs) are exchange traded futures contracts. They are modelled on industry loss warranty reinsurance contracts.
Last updated on 19 Jun 2008
