Deploying ILS capital into cyber, AI, data centres requires right fund structures: Albertini, Leadenhall

As cyber, data centres and artificial intelligence (AI) generate new material cumulations of risk, matching ILS capital to these emerging exposures requires the right fund structures to unlock investor capacity without compromising core portfolio value, Leadenhall Capital Partners CEO Luca Albertini highlighted to Artemis.

Speaking to Artemis around the key conference season, Albertini acknowledged that while the insurance-linked securities (ILS) space has seen trajectory growth in recent years, the market still faces challenges regarding capital deployment and ensuring capital providers are adequately remunerated for the risks they take.

“The first challenge is to make sure all parties (whether investors, brokers or protection buyers) agree to the importance of underwriting discipline and ensuring that capital providers are adequately remunerated for the expected risk they are taking,” Albertini told Artemis.

“More than a challenge is our duty to the industry to provide these warnings, but it seems the message has been well received.”

The Leadenhall Capital Partners CEO added that regulatory developments present a second challenge to monitor.

“The second challenge we need to keep an eye on what may come from the regulatory side. The ESMA recommendations on the inclusion of Cat Bonds in UCITS funds are for example a potential challenge to a large section of the ILS market which would need to restructure.

“However, the good news is that the Commission seems to have received the recommendations with a critical eye and there is no implementation schedule and the current expectation is that the Commission may not implement the recommended changes.”

Albertini also highlighted the ongoing effort to deploy ILS capital against evolving exposures without compromising core fund mandates.

“Data centres, AI and cyber all generate new material cumulation of risk which will require capital to be deployed. The ILS industry has been working on identifying solutions for those risks, and the work is on-going,” Albertini explained.

“For an investor the challenge will be the ability to underwrite those risks and the choice of the most appropriate fund structure/investment proposition to deliver these solutions to our ultimate investors, without diluting the main value proposition of the nat cat focused funds, which is to limit correlation with the credit and equity markets.”

In addition, as investors explore various avenues to allocate capital within the current ILS market and evaluate different ILS managers, Albertini identifies four essential factors for consideration: underwriting, claims, alignment with investors, and resilience.

Beginning with underwriting, Albertini emphasises that the ILS sector is “mainly an underwriting game”, and possessing a deep team with access to adequate resources and partnerships needed to underwrite the volume of business targeted is crucial.

Regarding claims, the CEO said: “access to a well rated claims team can make the difference after a large event. When claims processing is subcontracted from a third party, if the claim team is also working for its own balance sheet on similar exposures, the alignment is a strong plus.”

Next, concerning alignment with investors, Albertini noted that “a team with incentives aligned with the results of the investors (not only in terms of bonus, but also for example partnership interest in the manager) is more likely to take the right decision for investors.”

Lastly, with resilience, the CEO underscored how the ILS space can see high severity losses.

“Investors should look at managers who could sustain those losses whilst maintaining the team and the financial resources needed to manage the firm in distressed scenario. A large institutional backing for the investment manager is in this respect a plus. Also, a low turnover particularly for senior staff is a good sign of resilience,” Albertini added.

Read all of our interviews with ILS market and reinsurance sector professionals here.