AIG CEO Brian Duperreault has said he sees “so much untapped potential” in the ILS market.
The AlphaCat platform was part of the attraction for AIG in buying Validus Re, shortly after Duperreault took over at the insurer. At the time of the deal, Duperreault stated that he believed most of the financial attractiveness for AIG in the deal lay in the Validus Re division.
“But you ask the question five years from now, maybe I’ll say AlphaCat,” he said.
Speaking at the Sifma IRLS conference in Miami on Thursday, the executive cited cyber insurance as an area where massive demand for cover might make an opportunity for the ILS market.
However, Duperreault does not expect to see a groundswell of insurers trying to develop ILS platforms. Insurers with reinsurance arms, such as AIG, were more likely to push ahead in this area.
“The natural home [for ILS] is in the reinsurance market,” he added.
AlphaCat brings attractive fee income to AIG – “fees don’t tax your capital”, the CEO noted – but this income did not necessarily move the dial for the insurance group.
Insurers would not expand into ILS because of fees.
“You go into it because there’s a customer base looking for solutions,” Duperreault said.
Progressing its ILS plans would require making sure that AIG’s underwriters on the origination side of their business become comfortable with sharing risk with ILS investors, he added.
The AIG CEO noted that, over the past two years, the ILS market has proved it will stick around after losses – to the disappointment of some reinsurers without ILS capabilities, he quipped.
But he also said the second wave of the ILS market’s development now might see more testing of the value proposition of fully collateralised business.
As overall ILS capacity reduced in early 2019, the CEO noted that, when it comes to the preconditions for a harder market, withdrawal of capacity is a much bigger issue than destruction of capital.
The real question now is whether the ILS market and investors are questioning whether they got assumptions of how much risk they are taking wrong, after two years of losses, he added.
The market hasn’t yet seen this change in attitude, he noted, but “if California burns down”, it might become an open question.
Elsewhere, Duperreault said AIG is not planning to offer to take on tail risk or provide leverage to help its ILS affiliate AlphaCat take on more of its insurance exposures.
“If we solve AlphaCat’s problem, we create one for myself,” he explained. “That’s not the direction we’re going.”
If AlphaCat had tail risks that it was not able to collateralise, “they will have to find ways of offloading it that don’t come back to me”, he added.
Nonetheless, Duperreault believes the insurer will be able to create products from its portfolio designed specifically for the ILS market.