Clarity for ILS on Covid-related BI could take two more years: End-investors

The unexpected nature of Covid-19 related business interruption (BI) losses is troubling for the market, and it could be another two years before the insurance-linked securities (ILS) industry fully understands the impact, according to leading ILS investors.

To end day three of our virtual ILS Asia 2021 event, held in association with our headline sponsor AM RE Syndicate Inc., the audience heard from a panel of experienced pension fund investors who allocate to the ILS sector.

This discussion can now be viewed on-demand here.

While the debate covered a range of burning issues a particular focus was given to the ongoing pandemic, and specifically uncertainty related to potential BI exposures and concern over collateral being trapped because of this.

“There are definitely concerns,” said Eveline Takken-Somers, Senior Director, Lead Portfolio Manager – Insurance Portfolio, PGGM.

“So BI losses due to Covid itself remain a concern to us. It has to do with the unexpected nature of these losses, which I personally find the most challenging to communicate with our senior management, and also our board members. This is something they were not expecting and hence it requires quite a lot of explanation.”

For a market player like PGGM, which participates across the full spectrum of ILS instruments, Takken-Somers explained that it is quite hard to not be exposed.

Importantly, she stressed that throughout the pandemic her firm had pretty good visibility on BI exposure in its investments as they received regular updates from partners, which provided good transparency on this topic.

“On the loss itself, given the moderate risk profile of our portfolio and it’s focused more on the US, I don’t expect significant losses from now. But I think it will take a couple of more years to have the certainty. And that’s the element that I dislike,” added Takken-Somers.

Panellist Bernard van der Stichele, Portfolio Manager (ILS), Fixed Income & Derivatives, Healthcare of Ontario Pension Plan (HOOPP), also highlighted that after the event, he’s getting “fairly good transparency and clarity on the remaining issues.”

Echoing Takken-Somers, van der Stichele said that the uncertainty is still the most difficult element to manage as you’re not sure exactly how long that trapped capital is going to be trapped for.

“But I would say that overall, our partners are being very good at updating us with developments with respect to Covid related BI losses or potential losses.

“So, again, going back to what Eveline said at the beginning, the unexpected nature of BI losses with Covid is really, I think, what is more disturbing. When we invest in ILS we’re looking to invest in US wind risk, for example, or another peak peril, we’re not looking to invest in, or provide cover for pandemic risk. Sometimes we are, but we want you to know exactly what we’re investing in,” said van der Stichele.

Craig Dandurand, Head of Debt at the Future Fund of Australia, which allocates to the space through ILS fund managers, also highlighted good communication from partners on the pandemic BI issue.

“I think we’ve been in this long enough now that you go, alright, something bad in the world happened, let’s see where it hits the portfolio; it doesn’t necessarily even need to be a big storm anymore that does that. But that’s the nature of this particular beast. If you write enough lines of cover, some of them are going to get hit and for reasons that you may not have fully understood going in, regrettably enough,” said Dandurand.

Adding, “So the extent to which the pandemic added additional levels of complexity to an asset class which on its face is very simple and easy to understand, but in practice can be very complex, it is the unfortunate nature of this beast.

“And, I think it’s a perpetual challenge of trying to make sure that we’re as aware of those risks as possible. But at the same time, knowing that we will never fully be able to with incredible granularity get down to each and every risk that we have or don’t have.”

You can watch this session of ILS Asia 2021 on-demand here.

As well as the on-demand playback, we will be archiving every session from our online and virtual ILS Asia 2021 conference over on our YouTube Channel in the coming weeks and audio versions will also be uploaded to our podcast which you can subscribe to here.

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