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ILS Market Calms After Storms

Hannover Re executive says the hype over insurance-linked securities is over.
  • Meg Green
  • November 2019
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POWERFUL STORM: Typhoon Jebi brought high winds, waves and heavy rain to Japan’s Wakayama Prefecture in September 2018. Jebi caused an estimated $16 billion in losses for insurers. Cat bonds, collateralized reinsurance vehicles and ILS funds were impacted by the storm.
AP Photo/Yomiuri Shimbun


After years of hype, the market for insurance-linked securities is moving toward a “kind of normality,” said Henning Ludolphs, managing director at Hannover Re.

Ludolphs spoke with AMBestTV at Les Rendez-Vous de Septembre in Monte Carlo, Monaco.

Following is an edited transcript of the interview.

How would you describe the ILS market today?

I would say it's getting to a kind of normality after the last couple of years where we've had an almost ILS hype. The hype is more or less gone. It's probably going on to startups and digitalization. ILS is getting a normal part of the overall business.

So, yes, people are experiencing losses two years in a row. They're experiencing that losses go up, like with Typhoon Jebi. But, this is also part of the business, and so it's normal. Also, I think it's not unusual so many may leave the market, but others will come in.

How has the ILS market responded to those losses and the trapped capital aspect?

Of course, this is also a bit of a new experience for some of them. I would say most of investors accept this as a part of the business. They knew it before. It was part of the contracts. Others may try to rethink it. Can we maybe negotiate terms for the future? I don't see that the trapped capital point will change the market dramatically. It's part of the business.

Henning Ludolphs Hannover Re

The hype is more or less gone. It’s probably going on to startups and digitalization. ILS is getting a normal part of the overall business.

Henning Ludolphs
Hannover Re

What do you see happening in the future with ILS?

Probably getting a bit more through cycles as reinsurance does. As we see currently, it's probably 5% to 10% less money in the market than we had two years ago. I'm sure this money will come back early or later, clearly depending on how the rest of this year goes.

This is a normal way in long-term. I'm sure ILS, first of all, plays a major role in the business. Secondly, it will also draw. It will draw because for investors, it is simply good to have something which is not that correlated with other financial markets. If interest rates go up or down, it doesn't cause an earthquake.

It's a very simple thing, but this is really the major thought behind us all. In the long-term, there will be more need for reinsurance coverage, in particular, property catastrophe. We would have more catastrophes. We have larger ones. There are lots of people in the world who haven't bought insurance yet, a protection gap. This all will lead to more requirements for catastrophe reinsurance, which benefits the reinsurers and ILS.

In the long-term, I think more money will come in.

Hannover Re was one of the first to market with the cat bond in 1994. How have you seen the industry evolve since then?

The first 10, 15 years were more quiet. Then, it started to become bigger in 2005-2006 until there was a disruption, which was the Lehman [Brothers] crisis and investors disappeared. Since then, money came back, but we had some structural changes. In those days, there were more investors who came from all sorts of parts of the world.

Then, we have now the ILS managers, specialized people, knowledgeable, and they invest money on behalf of others.

There was a structural change in 2008, but also, I believe 2008 has shown the relevance and the value of ILS because ILS was almost the only asset class which was fairly stable, whereas all others went down dramatically.

I'm convinced that a lot of people looked at it and said, “Oh, wow. You should put a bit of money into this little ILS market,” which happened. Since then, more or less, it obviously went up. Now, we have a little bit of a curve down, but that's fine.

Do you see it expanding more into liability in the future?

I am skeptical. You may think about nice ideas, how to do it via parametric covers, blending a reinsurer with an ILS investor. I'm skeptical because it takes longer until you know whether you have a loss or not. There needs to be capital put behind it, which doesn't have enough premium to earn a decent interest every year.

I'm skeptical. I don't believe this is in the next couple of years.



Meg Green is a senior associate editor, AMBestTV. She can be reached at

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