A bright future and new risks for ILS

After a string of loss years, investors were re-evaluating their positions in insurance-linked securities (ILS), and general investment thesis more broadly. Many did further diligence on the impact of climate change and how models captured this. In certain cases, some investors exited the ILS market, while in other cases there was a flight to high quality ILS managers.

It was a difficult market to raise new money for potential startups. The retro market in particular is in a difficult renewal period, with limited supply due to trapped capital and some pullback of capacity—this could lead to sharp price increases for retro leading to some short-term opportunity.

Against this challenging backdrop, one or two high quality startups have entered the market with a good business plan and an experienced management team. I am cautiously optimistic that we could see some growth in the ILS market this coming year.

There are a lot of projects in-flight advancing innovation in different aspects of ILS. A few examples include using data and artificial intelligence to develop predictive models; developing tradable ILS markets; expanding the product horizon to more complex risks; and creating a rated balance sheet within the ILS group to allow for synergies with the collateralised balance sheet.

I cannot predict which of these will come first or which will move the market, but there is certainly a lot of innovation.

The limiting factor to date has been the models. Risks that do not behave in a predictable manner are much more difficult to model and thus price. Until this challenge is met, investors will be hesitant to take on these risks.

As a global professional services firm, EY provides market insight and helps clients innovate. Working with our global member firms, EY Bermuda provides awareness and insight on the merits of ILS as a differentiated insurance strategy, and as an investment option for our clients.

This educational process, while time-consuming at times, bears fruit for the sector in the long term. In ILS as in any other industry, EY assists clients with financial fitness and strategic priorities—from business case and startup services, to risk modelling, technology and operations, and innovation.

Bermuda has a reputation as an innovative jurisdiction, and there are a number of innovative projects in the works. The best way for Bermuda to support innovation is through its collaborative approach. The Bermuda Monetary Authority’s regulatory sandbox allows a company to test new technologies and business models with a limited number of clients in a controlled environment for a defined period of time.

This catalyses innovation and builds confidence in solutions. For earlier-stage innovation the innovation hub allows companies to collaborate and refine their proof of concept. There is more opportunity for collaboration between the business community and the government.

The government can set policies and strategies to attract and retain technology companies who might already be attracted to Bermuda’s existing insurance ecosystem.

Through our global network we connect companies with the contacts they need to further their business plans. Through our own service offerings, we can help companies navigate various complexities that need to be considered including regulatory, tax, operational and target operating model, to name a few.

We have seen technology disrupt business models in nearly every sector, and I think that it is just a matter of time for our industry to be disrupted as well. As a result, I believe that we will see substantial insurtech growth over the next decade-plus. I cannot predict precisely when we will see a hyper-growth period, but I do believe it is just a matter of time.