ROUNDTABLE: ILS

WHERE ELSE ARE WE SEEING INNOVATION IN ILS?

“We have developed products to enable the building of wind farms.”
Laura Taylor

Laura Taylor: The climate side is interesting. We have developed products to enable the building of wind and solar farms and there is continued interest from investors in products investing in renewables and environmental, social and corporate governance (ESG) business.

Taijaun Talbot: I agree that the funds had a big influence on the growth of the market and strategy. They also helped inform the wider supervision, the regulatory conversations. Back then, actuaries were at the heart of the conversation. Now, we also have an ESG team, the innovation team, the fintech team. As a regulator, we have had to expand our expertise in order to keep pace with the evolution of ILS.

“Who would have predicted the interest rate rises this year?”
Brad Adderley

Brad Adderley: It is worth reflecting on the accuracy of data. Who would have predicted the interest rate rises this year? What about inflation? Who would have thought the June 1 renewal would be so difficult? What is the next six months going to bring? I wonder what investors will make of this.

Adam Champion: I agree. A significant hurricane is probably the most predictable thing that could occur right now, while an earthquake would of course be a surprise, especially as it is seen as an attractively priced diversifier. And then there’s the increasing risk of so-called secondary perils.

Whether it’s floods in Germany or Australia or wildfires or winter storms, we have seen the pitfalls of data adequacy. For hurricanes the science is behind it and there is more of an industry consensus on price, but there are so many other uncertainties across the other perils.

Will investors leave? We saw waves of capital come in previous hard markets. Everyone assumes that when another big event happens, capital will freely flow into the space. Most recently, in 2018, money did come in but the market didn’t respond the way they expected it to, and therefore some left over the last five years.

I believe those who stayed see it as a core long-term investment. There are far fewer untapped sources of capital now than before, but pockets still exist. The ILS market has matured and grown exponentially more quickly than many other non-correlated financial markets.

Investors are more disciplined today on how they’re going to deploy capacity. They’re much more informed. Managers are telling them where other opportunities exist and when the prior opportunity is no longer interesting. That results in a more sustainable market.

Therefore, we would expect pricing to remain at a good level and the opportunities to respond to the data as it evolves.

“We have seen the pitfalls of data adequacy.”
Adam Champion

Peter Dunlop: The primary growth area for me is climate. The Bermuda Business Development Agency is pushing the agenda for Bermuda as the climate risk capital of the world. We are seeing a significant uptick in climate-related insurers and even some new dedicated ILS funds. Bermuda has led the way in addressing the protection gap and, especially with the tool of parametric coverage, has flexed to address climate risk by providing risk solutions that are not just catastrophe coverages.

Proxy revenue swaps, to name just one product, provide an ILS solution to agriculture companies by way of a financial smoothing of results that mitigate the effects of weather events and assist to avoid the a catastrophe loss from ever taking place. Bermuda is at the vanguard of those kinds of risk solutions.

Champion: It’s clear that property cat has proved itself to be less short tail and less definitive in its ability to predict and determine losses quickly. As we expand beyond property cat, you’re opening yourself up to even more complicated losses that develop over longer periods of time. And while the market wants to go there, there will be a learning process and there will be some pain.

Florida has been at the heart of the issues on property cat. There have been legislative changes which are a step in the right direction and there are more changes coming over the next six months. We are bullish as a company on Florida and we think the opportunity outweighs the risk, but this wind season is going to be an interesting one, to put it mildly.

Nick Jagoda: The view of risk continues to evolve and consider new and different risks. This has led to general increases in expected losses throughout the market. The well documented supply chain challenges and the various effects this has on claims inflation is just one of many examples which highlights the evolving nature of the risks we assume within the market.

“I wonder if there has been a shift in the mindset of investors.”
Taijaun Talbot

Talbot: In terms of the point about the duration of the risk and how long collateral is at risk for, that has clearly become extended in the eyes of investors. Trapped collateral caused this. I wonder if there has been a shift in the mindset of investors whereby they are willing to accept that and thus maybe other risks such as short tail casualty as a result.

Champion: The experience in property was not positive for many but it has opened up the conversation and shows that many investors are committed and educated in the space. It’s probably not as short tail as they thought, but it has opened up conversations around short tail casualty, specialty lines.

Many are extraordinarily hungry for non-correlated returns and they are open to looking at these opportunities. ILS investors do not see this as a purely opportunistic play where they want to come in for a year—the conversation has broadened.

“Cat is still a short tail line.”
Nick Jagoda

Jagoda: I agree there have been challenges, but a disproportionate amount of the issues can be attributed to Hurricane Irma which may have exposed challenges around reserving practices throughout the industry. Ultimately, a lot of this is Florida-specific. You don’t have the same development on a non-Florida hailstorm for example.

Irma was not something we want to repeat, but cat is still a short tail line. The idea of writing casualty or certain specialty lines remains largely untested within a pure collateralised vehicle.

Champion: Real improvements have been made to address the issue of trapped collateral and that has been a focal point for every ILS manager.

Jagoda: A lot has been done with terms and conditions. For example, buffer loss tables have evolved over time to provide enhanced liquidity and capital efficiency.

If you write 12-month contracts but have collateral unnecessarily trapped you then have to consider opportunity cost of not redeploying capital which is not a good outcome. In this scenario, it would make earning an adequate rate of return very difficult.

“Bermuda has led the way in addressing the protection gap.”
Peter Dunlop

Dunlop: Exit strategies are being looked at. The run-off sector has looked at this issue, but it has not happened yet.

Jagoda: In cat, you don’t get the same float as you’re going to have in the casualty market. Also, the run-off sector was spooked by what happened with loss development from Irma and in the Florida market in particular. The investor community has responded to the issues of trapped collateral and poor reserving practices.

Champion: The collateralised model has always been good at dealing with stressed parts of the market such as has been the case in retro and Florida. If there’s less stress, there’s usually more capacity available in the traditional market.

Jagoda: Bermuda remains at the epicentre of the ILS market. It is one of the top jurisdictions where young professionals sit shoulder to shoulder with senior executives learning this space. Other than in Zurich, London and Bermuda, you’re just not going to get the same access to professionals or the same education in the workplace. Bermuda has been at the epicentre of pushing innovation and change.

Image courtesy of Shutterstock / Master1305