Duperreault sees ‘huge potential’ to tap ILS

(Reuters) — American International Group Inc. Chief Executive Brian Duperreault on Wednesday said he sees “huge potential” within the insurer’s portfolio for use of a market in which investors trade assets tied to insurance liabilities.

The insurance-linked securities market, which developed over the past couple of decades as a way for insurers to pass on to investors some of their risks, mainly those associated with natural disasters, is a “good tool,” Mr. Duperreault said at an insurance conference sponsored by investment bank KBW, a unit of Stifel Financial Corp.

“I think you’re going to see more of it, not less of it” within AIG, Mr. Duperreault said.

Insurance companies that participate in the market typically issue catastrophe bonds. If no catastrophe hits, the bonds pay out a percentage of the premiums by way of coupons. But if a disaster does occur, the insurance company can use the funds to pay claims to its policyholders.

AIG’s acquisition of Bermuda-based Validus Holdings Ltd., which was finalized in July, included Validus’ AlphaCat unit, an investment adviser that manages capital for investors and AIG through insurance-linked securities and other investments.

The ILS market gives insurers another way for their underwriters to match risks they take on with sources of capital to cover potential claims, Mr. Duperreault said.