ROUNDTABLE: ILS
Q3: WHAT NEW DEVELOPMENTS DO YOU SEE IN THE ILS SPACE? HOW DOES ESG FIT IN?
“When we help rebuild things after an event, our ‘S’ credentials are good.”
Niall Baird
Baird: Environmental, social, and corporate governance (ESG) factors are talked about a lot. The insurance industry is a sharp end to climate change, but it is also debateable how ESG-friendly ILS and reinsurance can be.
Yes, you cover the ‘environmental’ element of ESG but in terms of governance and social, it’s tough, if not impossible, to have any real insight into the ‘S’ or the ‘G’ of the underlying insured.
The more appropriate place for the industry to start creating ESG-friendly products might be in insurance rather than reinsurance or ILS. When we help rebuild things after an event, our ‘S’ credentials are good. We should start thinking about the ‘S’ and the ‘G’ a bit more. That would be a healthy thing for innovation.
“In terms of wider innovation, there has been more interest in different perils.”
Craig Redcliffe
Redcliffe: There’s certainly an opportunity in the ESG space, especially in the public markets. It’s been a huge focus, partially given the US Securities and Exchange Commission (SEC) mandating certain disclosure requirements. As there is more focus from a regulatory perspective, there’s an opportunity for the ILS market to do more. It’s right that the risk financing, recovery and repair after severe weather events are favourable from an ESG perspective, but there are other components of ESG that need to be focused on as well.
We have received inquiries from specific ILS funds, to potentially launch ESG-relevant products. We‘ve seen a little more of that in Europe, as opposed to Bermuda but that is something that is starting to gain traction. There is an opportunity but also a risk of being left behind. We’ve already seen several European funds launch ESG funds, and we need to play a bit of catch-up.
In terms of wider innovation, there has been more interest in different perils. Speciality risks are being looked at and new regions. There is an appetite for that. There is a need for that, whether in Asia-Pacific or Latin America. The problem is the modelling of those risks: you need the relevant data and the relevant models to make sure that the risks that you‘re putting into your funds are properly modelled.
You do not want adverse surprises, which has caused some of the issues with investors. So, as an industry, we must tread carefully into some of these new perils and new regions to make sure that we have the data to support the underlying risk.
“One strength of Bermuda is that we have one consolidated regulator.”
John Huff
Huff: We’re seeing quite a bit of interest on the US regulatory side on ESG. And that might tie in with some of the work that the Bermuda Business Development Agency (BDA) has been doing around climate risk finance—pushing Bermuda to leverage its competitive advantage on natural catastrophe risk transfer in the climate risk finance space. It is very much in the zone of what we’re good at. We have this long and rich history of natural catastrophe expertise and risk transfer capacity.
We have the talent on the Island, whether it be in modelling, pricing, or analysis related to climate risks. And of course, we have the world-recognised Bermuda Monetary Authority (BMA), which will be increasingly important. In some jurisdictions, like the US, you have federal regulators—the alphabet soup of agencies—with overlapping mandates. One strength of Bermuda is that we have one consolidated regulator that can look at all aspects of an issue.
“Investors accepted a lower spread on the bond because it was considered ESG-compliant.”
Justin Hull
Hull: We saw a pretty neat transaction in 2021 when Generali did a cat bond that freed up capital to invest in green projects. I’ve seen many examples of greenwashing with ESG, but I thought it was a great example. Investors accepted a lower spread on the bond because it was considered ESG-compliant. As a result, this is an opportunity for sponsors to be ESG-compliant and issue at tighter spreads than they would otherwise.
“We could see the first ILS vehicles using a cryptocurrency.”
Brad Adderley
Adderley: There could be some other innovations coming up. We could see the first ILS vehicles using a cryptocurrency. The BMA is looking at these new innovative classes as they come up. There are a lot of new insurtech companies being formed which could also drive things. This will be a hot topic, and by year’s end, you might see a new vehicle like that.
“We have a history of monitoring the climate and protecting the environment.”
Greg Wojciechowski
Wojciechowski: ESG aspects are starting to attract the attention of a whole new demographic of investors. The overlying point here is that ESG is a massively broad notion, and no-one yet has a firm definition of what ESG entails in terms of compliance. The SEC is looking at disclosure and transparency around ESG, as are the EU securities commissions.
This is an emerging area; the vital consideration is that ESG is on the front of the minds of investors, board members and chairs. It is a topic that’s not going away, and Bermuda is very well positioned to take advantage of it. The BDA is creating a climate finance programme, which is an exciting move with the potential to have a global impact.
ESG is very much part of what we’re going to be hearing for decades to come at the BSX and we’ve been very aware of ESG through our affiliation with The World Federation of Exchanges. We’ve been discussing the value chain, and we’re in the process of setting out standards. We want listed companies to have some guidance that will dovetail with jurisdictional regulators as they approach disclosure and investor protection.
It is moving in the right direction. If we look at the UN’s Sustainable Development Goals, one is to make cities and human settlements inclusive, safe, resilient, and sustainable. Yes, it’s a broad, feel-good statement, but ILS possesses the characteristics necessary to foster resilience and assist communities in rebuilding following catastrophic types of dislocation and pressure.
This is very much why ESG is going to be a very necessary and popular topic. What’s notable is that investors are voting with their dollars which impacts what companies are doing. People are starting to put their investable dollars behind that and there is a shift around new wealth creation among socially aware millennials. They want to raise this as a topic to discuss and embrace.
Bermuda is well-positioned partly because we live on an island. Climate change will adversely affect us if it really accelerates in a catastrophic way. But we have a history of monitoring the climate and protecting the environment here. Conservation is in the Bermudian DNA.
This discussion about climate finance is particularly relevant given the depth of experience in the Bermuda-based insurance industry—climate risk has been an area of expertise for the last 30 years.
Image courtesy of Shutterstock / Ondrej Prosicky
