ROUNDTABLE: REINSURANCE
HAVE WE ALSO SEEN CHANGES IN THE ATTITUDES OF ILS INVESTORS? HAS THERE BEEN A FLIGHT TO QUALITY?
“Will there be a reallocation back to the sector?”
Kent Howard
Kent Howard: That’s a very complex question: how will the ILS space respond? ILS investors experienced tough years in 2017 and 2018 but if we’re pushed into a global recession, will investors again be searching for investments with low correlation to the financial markets, even despite the ever-increasing attractiveness in fixed maturity investments as a result of rising interest rates?
Will there be a reallocation back to the sector? We’re beginning to hear that conversation again in certain circles.
Jessica Laird: The biggest objective is to demonstrate to investors that you are getting paid for the risk, taking into account inflation and climate change, among other factors, in our underwriting. The uncorrelated component of ILS has always been attractive but the industry needs to get better at demonstrating pricing sufficiency and addressing issues such as climate change.
Overall, the industry has not done a very good job at this, especially when events don’t happen, but we expect capital will require it going forward.
“I wouldn’t be surprised to see more money come in.”
Brad Adderley
Tim Mardon: Some of the losses, and issues around trapped capital, did worry investors however. You can argue that COVID-19 losses were correlated with investment losses, which challenges the correlation assumption.
Brad Adderley: I always wonder how short term the memories of underwriters or investors can be. I wouldn’t be surprised to see more money come in.
Peter Bell: The money can come from different places—maybe it will switch from the pension funds to the hedge funds again.
Adderley: What’s interesting is how many of the same investors are investing in numerous players in Bermuda. The same investors are investing multiple times. It’s not bad at all, it’s interesting.
Laird: They have certainly not forgotten, but they want to make sure pricing has been adjusted for what we have learned in the past five years as well as for climate change. But rates are moving up on a risk-adjusted basis, which does make for an attractive opportunity. It is a question of demonstrating this to investors.
“ILS investors are more discerning now.”
Jerome Halgan
Jerome Halgan: ILS investors are more discerning now than they were in the soft market. They haven’t forgotten the claims observed since 2017. As a result, capacity is being given to underwriters who are doing the right things, and this goes beyond the basic of getting price increases: it also includes strength in portfolio construction, risk selection, reserving, reporting, etc.
The guys that have done this well are getting a lot of that capacity; those that didn’t do it well are losing it.
Howard: We’re seeing some consolidation of capacity. Sophisticated investors begin to better understand the complexities of the market with each passing year and their allocations become more discerning with the passage of time.>>>
“The diversifying nature of the risk is important.”
Jessica Laird
<<< Some of them are exploring again and more recently, others are considering starting up their own collateralised balance sheets.
Conor Gaffney: You’d have to wonder about asset allocation, be it from a hedge fund or pension fund, and whether there will be a potential rebalancing.
Laird: Everyone looks at how we try to balance that. The diversifying nature of the risk is important, as is the cost of capital and the attractiveness of the opportunities.
Image courtesy of Shutterstock / Terrance Emerson
