Investors in the insurance-linked securities (ILS) and catastrophe bond markets deserve to have equal levels of data transparency in transaction submissions, to enable allocation decisions to be made on a level playing field, according to Ben Brookes of RMS.
There is often disparity between the level of data that is provided along a catastrophe bond submission as compared to a reinsurance one. This means that the playing field is not level, putting some investors at a disadvantage when it comes to preparing their view of risk for transactions, according to Brookes, VP of Capital Markets at the risk modelling firm.
Speaking to Artemis at RMS’ Exceedance 2015 conference, held in Miami last month, Brookes discussed the need for there to be an increased level of transparency in the data submissions provided to ILS investors, particularly for catastrophe bond deals.
RMS, as part of its service to clients, re-models every catastrophe bond transaction that comes to market, whether it has provided official third-party services to the issuer or not. RMS’ clients therefore get to see a view of risk based on RMS models for every deal.
That raises the issue of data transparency and parity, according to Brookes, as the offering documents typically only contain an aggregate view of the underlying portfolio data required to model the deal.
Brookes said; “That brings out the question of the level playing field, where we are re-modeling based on information in the offering circular, which is aggregated, less detailed and sometimes doesn’t include details on inuring reinsurance structures. ”
This lack of parity between data disclosures submitted to investors, compared to the third-party risk modeler or an equivalent traditional or collateralised reinsurance submission, makes re-modeling more difficult for RMS and as you’d imagine makes it very difficult for investors to really create their own view of risk for a deal.
“This means you are inherently more uncertain about the results that you are producing, because if you have aggregate data you have more specification uncertainty,” Brookes explained.
With the rise of collateralised reinsurance within the ILS market, it is now the case that certain more sophisticated investors may get to see the full data disclosure through a collateralised placement, while other ILS investors more focused on catastrophe bonds may only see a more limited and aggregated version.
“In a world where you have collateralised re submissions, which are different to the equivalent ILS form, it can’t be a level playing field as investors are investing in both. Not all funds see collateralised re, for example, but broadly speaking all funds will see all cat bonds,” Brookes said.
That could actually put certain ILS investors and fund managers at a slight advantage. If they’ve received the full cedent data disclosure for a layer of its reinsurance programme, while at the same time that layer has a cat bond in the market, the cat bond focused investors and fund managers could be operating with less transparency.
Brookes commented; “That leads to, I would argue, a less efficient deal execution, because some people are pricing the risks using less sophisticated information than they might.”
Adequacy of submission data would help the risk modeling firms provide their clients with a better view of the risks, while also enabling the more sophisticated investors to better create their own view. This could be achieved by transparency and parity between the level of granularity in both catastrophe bond and reinsurance submissions.
“If you can provide more information into that process, if you can give people detailed data, they can make their own decisions about what is the level of risk in the deal,” Brookes explained.
Brookes said that he expects the market to become more discerning in its need for granular and transparent data disclosure, something that we’re perhaps seeing with push-back on a number of recent cat bonds. Part of the reason for push-back on pricing could simply be that the data provided does not allow investors to build up a view of risk that fits within the cedents pricing expectations.
“That’s a trend that I expect to see playing out,” Brookes continued. “Where the drive for a comparable level of information for cat bonds, versus insurance and reinsurance, is just going to continue. Because it’s a convergence market, this whole thing is converging, so why not see more information.”
Complete disclosure would help to remove some of the “slight opaqueness” that still exists in the catastrophe bond market, when compared to the transparency that reinsurers are privy to.
Getting to a level playing field, in terms of data submissions and transparency, seems key now that the ILS market is providing such a large pool of risk capital to the reinsurance marketplace. Particularly as some ILS managers and investors likely get to see both cat bond and collateralised reinsurance submissions for programmes.
Sophisticated investors will surely be quick to spot disparities between the data submissions they receive and should pressure the brokers and sponsors to provide a greater level of granularity, allowing the playing field to be leveled.
On the disparity between data across different submission types, Brooked commented; “It just doesn’t feel right. I would expect an efficient market to close that out, by demanding a bit more information on the cat bond side.”
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