Dealing with extraordinary events and the role of Insurance-Linked Securities (ILS) has to play was the focus for a talk by a US-based professor at the ILS Summit held at the Fairmont Southampton yesterday.

Dr. Erwann Michel-Kerjan, managing director of the Risk Management and Decision Processes Center at the Wharton Business School, discussed everything from the new risk architecture and the World Economic Forum (WEF) - Wharton School global risk initiative to the new public/private equilibrium and creating value through expanding the ILS market over the next five to 10 years.

After an overview of the past decade of turmoil, including a number of natural and man-made disasters such as 9/11, SARS, the Tsunami, the London bombings, Hurricanes Katrina, Rita and Wilma, the financial crisis, Madoff, the earthquake in Haiti and the BP oil spill, he concluded: "The past decade has been pretty bad. I hope the next one can be better, but I am not convinced unless we start doing things differently."

Outlining a changing world of risk, from growing interdependencies, changes in scale, higher speeds to uncertainty, modifications, and extreme costs and benefits, Dr. Michel-Kerjan said he had been involved in producing a global risk report identifying between 20 to 25 risks with major global implications gleaned from talking to politicians, business leaders and experts worldwide to present to the WEF held in Davos, Switzerland every January.

Among his previous findings were a report on the asset price collapse published in 2006/07, which concluded that the current system was unsustainable, and one on food security in 2007/08, with the two topics being interlinked through the switch from very sophisticated to very simple products as a result of the former's predicted demise.

Dr. Michel-Kerjan also spear-headed the 'War with the Weather' initiative, visiting New Orleans in the aftermath of Hurricane Katrina to see the impact of what had happened and work out a strategy for the US to deal with extra ordinary events of similar nature, which has been three years in the making.

"It is all about how the largest industry in the world, as in the re/insurance industry, prepares for the next decade and what is the role of the public/private equilibrium in this?" he said.

"The insured exposure of the US coasts between Texas and Maine as of December 2007 was $10 trillion and if you have hurricanes like Katrina it doesn't take a rocket scientist or common sense to see that things are going to be bad."

Dr. Michel-Kerjan, who was elected chairman of the Organisation for Economic Co-ordination and Development's High Level Advisory Board on Financial Management of Large-Scale Catastrophes and serves as a member of the WEF's Global Agenda Council on "Innovation and Leadership in Reducing Risks from Natural Disasters", said there had been a change of mindset from a "market" mentality to citizens demanding protection from the US government with a switch towards greater government intervention.

He said that the ILS market had so far positioned itself mainly as an alternative to traditional reinsurance and was not yet a solid part of the new public/private equilibrium.

Among some of the options available for entrants to the ILS market, were the opportunity for countries to issue cat bonds and to invest in them, citing the examples of Mexico, the US and Morocco.

The second session of the day featured a panel debate on 'Educating Institutional Investors: Strategies For Conveying The ILS Value Proposition To Non-Specialist Investment Audiences' including moderator Ryan Bisch, senior investment associate at Mercer, David Rae, senior analyst for private markets at New Zealand Superannunation Fund, Morton Lane, president of Lane Financial LLC, Philippe Trahan, porttfolio director of ILS at Ontario Teachers' Pension Plan, and John DeCaro, founding principal at Elementum Adviors.

They considered a range of issues from the differences between explaining the asset class to institutional investors and to hedge funds, and the asset allocation decision making process for pension funds, endowments, and other institutional investors to the pension plan decision-making unit and the ILS value proposition.