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Investors push to expand alternative risk transfer to new options overseas


MONTE CARLO, Monaco — Investor appetite for insurance-linked securities and other alternative risk transfer options remains high despite lower prices for U.S. property catastrophe business.

Brokers and capital market investors are exploring ways to transfer new forms of risk, such as contingent business interruption, through capital markets, experts say.

According to research published by Guy Carpenter & Co. L.L.C. during the recent Rendez-vous de Septembre reinsurance gathering in Monte Carlo, Monaco, about $20 billion of fresh capital has entered the market via investments in insurance-linked securities, sidecars, hedge fund-backed reinsurers and collateralized reinsurance vehicles in the past 24 months.

While U.S. property catastrophe risk still dominates the perils underwritten by such vehicles, a desire to diversify means that investors and cedents are exploring the viability of using insurance-linked securities for different risks and territories, experts say.

“Newer capital is becoming more flexible,” said Nick Frankland, London-based CEO of Guy Carpenter's Europe, Middle East and Africa operations, and likely will find ways to underwrite in territories and lines other than U.S. property catastrophe.

The fact that an indemnity-based catastrophe bond was placed in Europe this year likely will accelerate the trend of using such instruments outside of the United States, said Paul Schultz, Chicago-based CEO of Aon Benfield Securities, a unit of Aon Benfield Group Ltd.

That bond, Windmill I Re Ltd., provided Dutch reinsurer Achmea Reinsurance Co. N.V. with €40 million ($51.3 million) of reinsurance protection against European windstorm risk.

While capital market investors are likely to still prefer catastrophe business, the volume of available capacity likely will exceed demand and prompt moves into other areas, Mr. Shultz said.

More midsize sponsors have begun to explore the use of ILS, and the investor based is growing, said Shaun Geils, manager of insurance for Kane (Cayman) Ltd. in Grand Cayman, Cayman Islands.

Experts say capital market investors are looking for risks that, like property catastrophe, can be modeled or respond to triggers to transfer them via ILS instruments.

Next likely will be corporates or public entities using ILS mechanisms to directly transfer risks, said Rick Miller, managing director and co-head of insurance-linked securities at Jardine Lloyd Thompson Capital Markets Inc., a unit of London-based Jardine Lloyd Thompson Group P.L.C., in New York.

A company that needs speedy access to funds after a catastrophe could use a cat bond with a parametric trigger as a hedging tool in addition to insurance, he said.

Such bonds, which could be private placements or 144A structures, would need “clean” triggers, such as an earthquake of a certain magnitude or a flood of a predetermined depth, he said. But cat bonds could offer cedents swifter access to funds vs. insurance requiring evidence of physical loss and audit rights.

If brokers are creative, risks such as business interruption can be covered by ILS with a parametric trigger, said Eric Paire, head of global partners and strategic advisory for the Europe, Middle East and Africa region at Guy Carpenter in London.

Many investors want diversification by underwriting new risks or geographies, Mr. Paire said.

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