ILS
The evolution of Bermuda’s ILS sector
When ILS Bermuda launched 10 years ago, many outside the industry had no clue what a special purpose insurer was for. Now, ILS experts can see just how far investor sentiment has come.
“We were all trying to bridge insurance and capital markets’ different ways of talking about risk and capital.”
Kathleen Faries, Artex Capital Solutions
With Convergence celebrating its 10th anniversary soon, a degree of sentimentality was to be expected at a recent gathering of experts in insurance-linked securities (ILS). After all, the annual conference is recognised as the leading industry event for the ILS sector and showcased in the leading jurisdiction for ILS.
But the roundtable discussion, which was arranged and published by Bermuda Finance, and hosted by EY Bermuda, soon changed topic to sentiment of a different kind.
Kathleen Faries, chief executive officer of Artex Capital Solutions, and formerly chair of ILS Bermuda, said it was interesting to recall why the event was called ‘Convergence’.
“We were all trying to bridge insurance and capital markets’ different ways of talking about risk and capital,” she said.
“We don’t even think about this any more, investors understand the asset class and have become a stable and embedded part of the reinsurance industry.”
“We are seeing an absolute hunger for non-correlated risks to the equity markets.”
Adam Champion, Ed Broking
Adam Champion, executive vice president of capital markets at Ed Broking, described the range of investors drawn to ILS.
“We’re having lots of conversations with investors who are new to the space or in the space already. Some are interested only in investing in balance sheet risk, versus those seeking fee income,” he said.
“We are seeing an absolute hunger for non-correlated risks to the equity markets, and while that has always been the driver of capital to the ILS space, it’s even more so now,” he said.
Nick Jagoda, partner and portfolio manager at Aeolus Capital Management, said that, from a rate adequacy perspective, the collateralised space has the benefit of repricing risk on a 12-month basis as opposed to looking at something on a static basis.
“There’s optimism that inflation is being built into pricing with adequate buffer to compensate for what could be additional inflation,” he said, adding that trapped collateral remains a challenge for the market.
“It is certainly easier to address it in a hardening market through terms and conditions. Whether it is through improved buffer loss factor tables or sunset clauses, the market done a lot to alleviate that pain. But this remains a headline topic for investors,” he said.
“Investors are rightly asking challenging questions.”
Laura Taylor, Nephila
Edouard von Herberstein, partner at Hudson Structured Capital Management and chief underwriting officer at HSCM Bermuda, said the collateralised market “has shrunk and continues to shrink for all the reasons that we know”.
“Even the ILS market has slowed down quite significantly in the last three months, which nobody expected, but people are concerned about the same issues. That is convergence,” he said.
He agreed on the appetite for diversification and opportunities outside of cat.
“The brokers are educating themselves with how to structure a casualty or a cyber deal that fits the ILS investor. It’s not happening as fast as I’d like to see, given the amount of people working in that space and all the money flowing into managing general agents and service companies,” he said.
Laura Taylor, president of Nephila, said the industry needs to do a better job of articulating how it is pricing for new pressures, to assure investors that they are receiving an adequate return on the risk.
“Similar to a post-credit crisis, when the broader financial markets struggle, the value of truly non-correlated assets increases. However, investors are rightly asking challenging questions about climate change, deficiencies in the industry cat models, inflation and fraudulent claims and they expect to be compensated for these uncertainties,” she said.
“If cedants wait, could they end up paying even more?”
Brad Adderley, Appleby
Peter Dunlop, a partner at Walkers, said it seems the potential for disputes has increased between third party capital investors and whoever is managing their sidecar.
“So far, managers and investors have taken a commercial approach to avoid full-scale disputes but if conditions do not improve, we could see more arbitrations taking place, which no-one but the lawyers want. There is an enormous range of what it could cost the industry,” he said.
Brad Adderley, Bermuda managing partner at Appleby, noted there has been business which wasn’t placed in the renewal.
“Could the year-end renewal be done early—or will people wait and see what happens in hurricane season? But if cedants wait, could they end up paying even more?”
Taylor said there were cedants who are discussing 1/1 renewals but expect the market will wait “as there is little upside to binding part-way through the year”.
She continued: “The required return on capital will be dependent on the wind season but also broader market dynamics.”
Jagoda said the concept of rate adequacy and adequate data is a constant evolution, but that underwriting and the deployment of capital had become “much more disciplined”.
“That’s not just in ILS but across the whole reinsurance market, even more so than in 2006. Perhaps the difference is we have better data now. If you were to compare risk/return profiles from 2006 to today, it’s apples and oranges.”
To read the full conversation from Bermuda Finance click here
Image Credit: Shutterstock.com / fran_kie
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