Baird: There is some caution among investors, despite common sense telling them that now is an excellent time to get involved. There is a concern about the models in the context of climate change. There’s a lot of appetite to see more modelling, more data, newer models and maybe some acknowledgement that the existing ones haven‘t been working that well.

That reticence is driving people into the lower volatility, safer, higher layers space. We’ve seen a significant shift there.

There is growing interest in different pools of risk, maybe specialty risk. Some of the funds might start accessing things such as cyber and crypto risk. Issuers’ interest in third party capital is as intense as it’s ever been.

It is often seen as part of a parcel of opportunities for carriers to diversify their capital base by using traditional structures from ILS to quota share to sidecars, to run-off.

It is part and parcel of the holistic view around how the more advanced carriers are beginning to develop.

Redcliffe: I agree that the non-modelled losses continue to be an issue from an investor’s perspective. There’s a gap between what’s being promised, and investors’ expectations. That gap needs to be bridged. Investors have spent a lot of time talking to mangers about their models and how they should react in different loss scenarios.

But we’re continuing to see some losses diverging from their models. This continues to drain the patience of investors and could lead to a flight to quality. You could see investors focus on ILS managers who deliver on their promises, deliver on their performance, minimise the adverse loss development, and have a good understanding of how climate change impacts the models—and how they’re factoring in this risk into their pricing.

Much of this comes down to tactical one-on-one discussions and getting investors comfortable during their due diligence.

Adderley: From a new formation point, we are seeing some interesting newcomers. There are plenty of investors still willing to invest and we have seen some funds raise a substantial amount of capital in a brief period.

Yet, I agree, there are a lot of losses. That dynamic is intriguing. But the new formations are experienced players—players who have already built a reputation in the market and are now venturing out to start their fund.

They are raising a lot quickly, but they have existing reputations. But it is interesting when you consider the recent losses, the concerns over climate change, the problem of trapped capital. If investors are tired, why are we seeing more money coming in? The marketplace is still growing. It doesn’t quite fit together. Maybe I only see the births and not the divorces.

Hull: I am slightly less positive; the overall sentiment is loss fatigue. Part of the startups that we saw in 2021 was a function of timing: there were losses in early years and the money arrived then. It’ll be fascinating to see if significant amounts of capital come in following the events we had in 2021.

Rates are going up and historically that has been enough to get investors excited and make allocations. But investors also increasingly realise that higher rates are meaningless without the proper quantification of risk.

Investors are saying, “OK, 15 percent rate increases are exciting, but I have no frame of reference for what that means, because the risk may have been understated by 30 percent.” On a risk-adjusted basis, they are not clear that is a good trade.

I do agree that the new money will go to quality managers: those who can demonstrate they can adequately quantify risks, who have included climate change in their modelling, and can show investors that.

Wojciechowski: If you look at this from a historical perspective, this is still a maturing asset class. When ILS first started to gain traction with institutional investors, the main reason was its robust yields and low correlation to the broader capital markets.

You might now ask whether macro-environmental circumstances have changed this dynamic, considering the pressure on the interest rate environment. As better yields are available elsewhere that might test the appetite of investors.

But the ILS structures being used have matured over the past 10 years. They have proven to be an effective way for the capital markets to gain access to risks unavailable before.

We’re watching the asset class mature. We’re seeing more diversification. Risks such as cyber and flood are being looked at which is an intriguing development. Perhaps risks such as terrorism, mortgage risk and future catastrophic issues such as oil spills can be covered. What is clear is that this asset class has the attention of institutional investors which can address the protection gap that continues to develop globally. The insurance industry and the capital markets can work together to help close the protection gap.

I remain optimistic. The ILS vehicle is now a palatable instrument for capital market participants who are willing to look at new opportunities that exist in risk transfer.

There are going to be tests and shocks, but history has shown this asset class is robust. It continues to be an innovative solution to allow ongoing access to insurance risk.