Investors in ILS are seeking innovation—they may find it in Africa where a combination of transnational bodies, better data and a desire to structure improved disaster relief could combine with new ILS domiciles.

The Insurance-Linked Securities (ILS) market ended another year on a high note as the annual new issuance record was broken once again.

This milestone was achieved in spite of a challenging year of catastrophe losses and with most market participants working from home. The ILS market continues to demonstrate its resilience with bonds issued in every month of last year and almost USD 13 billion of total new issuance for the calendar year.

A growing pipeline of risks could soon be transferred

A growing pipeline of risks could soon be transferred

A growing pipeline of risks could soon be transferred from markets in Africa, utilising risk transfer tools including parametric insurance and insurance-linked securities (ILS). This will be made possible because three of the key things required for this market to flourish are starting to align (see Global Insurance-Linked Securities Market Outlook).

That is according to three senior leaders playing a key role in the development of this market: Kirill Savrassov – chief executive officer, Phoenix CRetro; Urs Ramseier –group chief executive officer, Twelve Capital; Phillip Pettersen – non-executive director, African Risk Capacity (ARC).

They say that investor appetite for such risks has developed and is strengthening; the desire to transfer more risks from a market that is chronically underinsured is rising; and Hong Kong is emerging as a potential ILS hub. These three factors could pave the way for deals getting done.

A successful ILS market in Africa would need three things: appetite from the investors, which is growing and they are especially interested in products like sovereign parametric catastrophe bonds; advanced sovereign pools seeking new solutions, which is the case with ARC; and a willing domicile, which we are now seeing with Hong Kong, which is looking to attract companies from all over the world to use it as a jurisdiction

Kirill Savrassov, chief executive officer, Phoenix CRetro

The ARC Group comprises ARC Agency, a Specialised Agency of the African Union, and ARC Insurance Company, a hybrid mutual insurer and the commercial affiliate of the Grgoup. ARC Agency was established to help African governments better plan, prepare for, and respond to natural disasters, as well as outbreaks and epidemics. ARC Insurance offers complementary risk pooling and risk transfer services (see ILS Market Cyber Insurance Survey).

Commenting from an investor’s perspective, Ramseier confirmed that investor appetite for such risks is there—and that is partly due to a change in what some investors are looking for in the shape of their portfolios.

Investors used World Bank bonds as a diversification traditional capital

“Previously, investors have perhaps used World Bank bonds as a diversification in their traditional capital portfolios. But now, we see more what you might call ‘impact investors’, typically family offices but also pension funds, looking to have a direct investment in disaster relief in emerging markets. This goes beyond environmental, social, and corporate governance (ESG) factors and is seen as impact investing (see ESG Strategy & Implementation).

There is growing demand from investors. The challenge is the sourcing of suitable investment opportunities. You need a number of uncorrelated perils to have a decent level of diversification in a portfolio. But if you can achieve that, there is substantial investor appetite. These investors are in addition to traditional ILS investors. They have a different motivation

Urs Ramseier, group chief executive officer, Twelve Capital

Why 97% of all disasters in Africa are uninsured?

ILS transaction

Pettersen explained how this translates into what ARC does. He pointed out that some 97 percent of all disasters in Africa are uninsured. That means a massive challenge when it comes to providing relief to the vulnerable populations, and insurance solutions are fragmented across the large continent.

This is why ARC was formed. It works directly with governments on developing efficient solutions to disaster management. It has already developed a range of risk management mechanisms, some of which are parametric and have been placed with international reinsurers, he explained.

This is impactful stuff but there is a lot more we can do. And as things stand, we have not transferred risks into the capital markets

Phillip Pettersen, non-executive director, African Risk Capacity (ARC)

Opening this door could enable many more risk transfer opportunities, he believes.

One of the other challenges Pettersen admits to is the availability of accurate historical data—something any form of risk transfer relies on. Unless you can get adequate, robust, independent data that is acceptable to everybody, we can’t put anything together.

We want to be able to give investors the opportunity to pick up some exposure in Africa. That will enable the diversification of portfolios as there’s not a lot of exposure in Africa. I believe that if we can get the right product on the table, investors will come.

ARC uses a lot of satellite data but the quest to improve what is available is ongoing, he added.

The challenge of pulling ILS deals

The challenge of pulling ILS deals

Savrassov described the challenge of pulling these deals together as a three-sided coin: three key parties need to work in tandem for deals to work. He agrees that investors need to be comfortable with the data and risk modelling. “It must be a product and data which satisfy the ultimate investors,” he said.

A good solution can be working with a development bank or other body that may step in the aftermath of a disaster. “The idea is simple: instead of allocating huge levels of funds in the aftermath of a disaster, they instead sponsor a cat bond, for example, for a return of a few percent,” he explained.

By doing this, those development communities are not only helping countries to have an immediate post-disaster risk finance instrument, they develop an advanced instrument of how to tackle immediate cash needs. But there is no trick. It’s a normal calculation. ILS investors are very smart but they are the ideal sponsor for such a bond.

Finally, Savrassov again stressed the importance of China pushing Hong Kong as a centre for ILS and the importance of Africa to China (see Parametric Catastrophe Bonds and Alternate Risk Transfer Mechanisms for China’s Market). “It is a new ILS centre with the ability to list those bonds in other parts of the world. For me, it looks like an ideal solution and it’s a very interesting coincidence,” he said.

“But we now have a unique set of circumstances that can be used for the advantage of suffering African nations and investors who are seeking either diversification or impact investing, or both. And they’re very serious about this.”

A benchmark ILS transaction

ILS transaction

Ramseier believes that a landmark transaction, involving a body such as ARC, would be enough to kickstart the market and the concept. “The sooner the better. We need a benchmark transaction by somebody like ARC kicking off the market so people start to understand the advantages of ILS for these countries.

We have had World Bank bonds. But that’s slightly different. If we can get a big capital market transaction from a regional organisation, that would be a breakthrough.

That could happen soon. Pettersen says ARC is close to releasing a bond that would specifically cover contagious diseases and pandemics in Africa. It would be parametric in nature, probably triggered by a percentage of confirmed cases and pay out to help countries locking down fund equipment and supplies. “That will be an interesting opportunity coming into the market,” he said.

Savrassov believes such a deal would be welcomed by investors. He points out that many investors are now overexposed to certain perils, such as US wind.

This industry is not a large one, and everyone has certain risks, so diversification within the ILS class becomes more and more important. The lack of it has created a natural ceiling for the development of the ILS market. New perils or territories are needed.

Ramseier agrees and noted that an accelerator for the development of new risks and investor appetite will be climate change. “Climate change means a significant increase in the frequency of natural catastrophes. More people are exposed to these risks and need protection. But it widens the protection gap. The need for protection is exponentially increasing because of climate change,” he said.

Helping to close or reduce the protection gap is a big task—and one that can be done only with the support of the financial markets. The re/insurance industry is far too small to do it. It is not an easy task but some of the uncertainty is being addressed by improving risk models and by a better understanding of the impact of climate change.

“There is a lot of effort going into this, by new companies and startups, to understand the impact of climate change on wildfires, on tropical cyclones, etc. New data and new techniques are being developed. Five to 10 years down the road we will have a much better understanding of climate change on natural catastrophes and there is a big demand out there.”


AUTHORS: Kirill Savrassov – Chief executive officer, Phoenix CRetro; Urs Ramseier Group chief executive officer, Twelve Capital; Phillip Pettersen – Non-executive director, African Risk Capacity (ARC) for Intelligent Insurer’s Baden-Baden Today.

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