ILS COMES OF AGE ON BERMUDA
Q: What are your expectations for the response of ILS to all these market conditions?
“Investors who are well informed understand the opportunity that ILS brings to this market.”
Andre Perez
Perez: I will start with the negative because I like to end on a positive note. We’ve had a number of years of heavy losses, we had the California wildfires which brought a bit more uncertainty in terms of non-modelled risks being assumed. Now you have COVID-19 and potential seepage within the property cat area—again it wasn’t modelled and probably wasn’t even priced, and it makes investors worried. There’s always uncertainty.
I know a lot of investors will ask ‘what are you doing about climate change in terms of the modelling?’. All of those factors combined, which led to trapped collateral, losses coming from different areas, have made some investors nervous about this sector.
The positive side of it is that investors who are well informed understand the opportunity that ILS brings to this market, and already in January we had some pretty significant rate increases. Certainly, we’re seeing more rate increases in June and July and as that trend continues, there are always going to be opportunistic investors.
Despite all of the negatives, ILS is still very important market. The cat bond sector has probably had a banner year this year and will probably have a banner year next year as well.
“Looking at the year round, I will be interested to see how many new classes there are for reinsurers.”
Brad Adderley
It’s too big to ignore and I’m encouraged about the fact that we’re getting existing ILS funds, raising additional capital, we’re seeing new ILS platforms being formed.
The future is still bright. From Horseshoe’s perspective, we are the busiest we’ve been since Horseshoe was born. That gives you a sense of the market activity.
Adderley: I’m with Andre on this. Normally, you’re busy after Monte Carlo but it’s been crazy through COVID-19. I thought after we all went into lockdown it would be quiet, but I’ve seen none of that. The amount of business that’s come in the summer for cat bonds coming early is huge.
This is along with the startups we had pre COVID which haven’t hit the press yet, and then you add into that all the management teams and people we’re talking to now about raising capital.
Looking at the year round, I will be interested to see how many new classes there are for reinsurers, new ILS funds, who’s raised capital. Even life reinsurers, there’s some unique things going on right now in this space, which people will look at and go wow.
There’s a lot going on and it’s going to be absolutely crazy.
“We’re seeing a lot more enquiries about how to facilitate a third party capital strategy.”
Anup Seth
Seth: If you look at the different solutions that the ILS industry is offering, on the cat bond side we’ve certainly seen an increase in demand and given the increased liquidity that investors like, that side of the business is doing really well.
At the other end of the spectrum, some of the larger ILS funds are transitioning from special purpose insurers to commercial reinsurance companies, for example a class 3a licence.
This enables them to obtain a financial strength rating and compete with the traditional reinsurance companies and benefit from capital leverage.
The other piece to mention is traditional carriers have accelerated their third party capital strategies to leverage their underwriting and distribution infrastructure and earn additional fee income.
We’re seeing a lot more enquiries about how to facilitate a third party capital strategy.
“A key element and advantage of ILS is the ability to be very nimble in terms of how the capital is deployed.”
Ariane West
West: A key element and advantage of ILS is the ability to be very nimble in terms of how the capital is deployed. You have enhanced flexibility to seek out the best value, and to look at new risks and new strategies and have quite a broad playing field and vision in terms of which way you’re going to focus at any given time, given where rates are and how we’re viewing the risk in any market for a given season.
With respect to challenges such as climate change, that is something we devote significant resources to in terms of our analysis and looking at evolving climate trends.
This has been thrown into sharper focus for society at large, particularly in terms of the past five to 10 years, but it’s something our industry has always been highly attuned to. It’s fundamental to our view of risk.
Managing that effectively is key to ensuring that we’re getting the right returns for our investors and seeing the full board when we make underwriting decisions.
“The events of the last few years have forced ILS managers to truly understand the risk they’re taking.”
Adria Richards
Richards: There have indeed been a few consecutive years of trapped and lost capital and then you’ve got COVID-19 and the uncertainty that this brings from a potential exposure perspective. I agree that there are some headwinds for the ILS market that could persist into 2021.
We’re always going to use ILS capital and, despite some of the dislocations in the market, we successfully raised third party capital in support of the recent mid-year renewals.
However, the events of the last few years have forced ILS managers to truly understand the risk they’re taking and partner with companies who have a track record of performance and execution: a flight to quality.
“We’re continuing to be very bullish on the ILS sector generally going forward.”
David Brown
Brown: In terms of ILS: we’ve seen a bit of a slowdown over the last couple of years just with some trapped capital, etc, but we’re continuing to be very bullish on the ILS sector generally going forward.
It’s encouraging to see some recent potential new launches, so longer term you’re going to see some successful standalone ILS players, but you’re also going to see the use of third party capital with the teaming with traditional reinsurers or as part of their organisations and leveraging their underwriting.
Bermuda has such a strong reputation on the asset management side and that’s a key ingredient to the success of ILS as a leader so we just need to continue to leverage that and hopefully with some of the economic substance and those types of things, the ILS industry can stimulate the additional growth on the more traditional fund space.
Perhaps the ILS industry can also play a role in addressing some of these pandemic-type risks going forward.
In association with:
A Bermuda:Re+ILS Special Report