As the ILS market continues to grow in global popularity, Bermuda’s top ILS leaders converged on the Insurance & Risk-Linked Securities Conference in New York last week. One of the attendees, Arthur Wightman, PwC's Insurance Leader, sat down with The Royal Gazette’s Lindsay Kelly to provide his insights and perspectives on the state and future growth potential of ILS for reinsurers.There has been a surge of activity in ILS recently — what has been the reaction from the traditional reinsurance marketplace?ILS has long moved past the point where it was simply a narrow part of reinsurers’ broader retrocession programmes. Now we are seeing convergence core competencies very much embedded into the strategic agendas of reinsurance executives and boards, and where once we saw the transformation of insurance risks to the capital markets as the preserve of a limited number of highly specialised market participants, it now sits very much as part of the reinsurance value proposition.How is the convergence marketplace evolving?In discussions with a wide range of investment banking and reinsurance executives there is now a clear diversity of offerings available to sponsors and investors alike. An evolution has taken place over a relatively short period, sparked by the increasing familiarity and comfort with using such alternative products. While we saw a staggering volume and value of catastrophe bonds last year, industry loss warranties played a strong role on some of the bigger catastrophes, and innovation came through some of the county weighted products that enabled risk transferors to use capital market products while better hedging their insurance (basis) risk.We hear a lot about the role of sidecars as part of reinsurers’ strategies — what’s happening on this front?Sidecars have become a fairly central part of reinsurers' strategies now, particularly in Bermuda but also in Lloyd's and while in the past these were typically funded by short term, non-sticky capital, reinsurers are now securing long term partners with options to replenish capital after major events. There are many advantages of this, in particular the flexibility this provides to the reinsurers and investors alike.There has also been a lot of new capital into the sector — in which new ways has the market responded?It appears that the most interesting change for reinsurers is the establishment of dedicated investment funds attracting third party capital. These funds invest in collateralised reinsurance and securitised insurance products and provide diversification plays for large-scale investors such as hedge and pension funds. There is considerable activity in this area and based on discussions at the conference it is expected that a number of reinsurers will be announcing their own funds in the next year. The skill sets required here are not altogether core to reinsurance underwriting and we have seen reinsurers adding to their teams trading and portfolio management specialties. Whether through sidecars or investment fund management we are increasingly seeing fee income contributing more and more to reinsurers' results relative to underwriting and investment income.While there has been a rapid move by reinsurers into this space, it’s a very technical area, and while reinsurance expertise is critical, capital markets skills are equally fundamental. This in part explains the considerable hiring activity witnessed in the last six months. It’s also highly important to focus on serving the requirements of equity investors in the holding company while also managing third party capital objectives. This is not an altogether easy task.What are some of the challenges you see in this market?It is important for the industry to continue to focus hard on its core value proposition, so while fee income is attractive, reinsurance underwriting expertise needs to remain firmly at the heart of any reinsurance enterprise. Similarly, the flood of capital is undoubtedly depressing the rating environment and time will tell how stable that capital is particularly after a big loss. Anything that could create an issue with a reinsurer reloading its balance sheet requires proactive management. Notwithstanding the challenges, the convergence environment does offer cedants choice which ultimately allows them to hedge risk in tandem with traditional reinsurance better than if they went one route or the other. It is for that reason that a reinsurance company that actively selects to not add a convergence strategy to its value proposition will ultimately see its business shrink.The activity between reinsurance and capital markets convergence has shown how innovation is important to the overall value proposition to cedants and investors and has reignited capital markets interest in the sector. Key to the future of both, however, will be innovation that ultimately creates net growth to the sector.What sets Bermuda apart as a leading jurisdiction for ILS?Bermuda is at the centre of development in the ILS market. I think that Dr Grant Gibbons, Minister for Economic Development, said it best in a recent quote in The Royal Gazette that “A combination of intellectual property, leading investor and reinsurance marketplaces, a tried and tested approach and the right listing and regulatory backdrop, provide for optimal conditions and competitive advantage for transacting insurance-linked deals.”For these reasons, the Island continues to demonstrate its propensity to innovate and evolve the reinsurance value proposition and with that, investors, customers and reinsurers are ultimately better off. The rating agency Fitch validated Bermuda's prominence in a recent report, stating it as the top convergence and alternative reinsurance domicile.