The low volatility and projectable cash flows offered by high frequency, low severity perils in areas such as casualty insurance or reinsurance, are increasingly gaining attention from more experienced investors looking for relatively uncorrelated returns and higher yields, according to industry experts.
Yesterday, Artemis and Vesttoo delivered a live webcast focused on the opportunities for investors to access high frequency, low severity insurance asset classes.
To start, Yaniv Bertele, Chief Executive Officer (CEO) of Vesttoo, explained that these types of perils, such as motor liabilities and casualty risks, “all have a common ground that separates them from catastrophe risk, which is their low volatility and projectable cash flows.”
He went on to explain that the stochastic nature of these risks empowers the opportunity of leveraging technology to enable the risk transfer, and at the same time educate the markets on attachment probabilities and expected loss distribution functions that could serve to educate rating agencies, for example.
“This is particularly attractive to large asset managers, we believe. And as the market is democratised to include more capital market players, we’re seeing more demand for these types of perils. Using technology and multiple data sources, both claims data as well as other sources such as inflation data, we’re able to create highly accurate forecasts for claims development,” he said.
Adding, “I do believe that the data driven technologies allows us to provide for risk transparency and performance monitoring of those risks sites. Which are both very important to investors, effectively translating the insurance risks to something that they can better understand.”
According to panellist Mattias Eng, Head of Insurance Solutions, Securis Investment Partners LLP, investor appetite and interest is currently strong for not only conventional property cat investments, but also for casualty risks and for new ways of participating in the property cat market.
“And we’re also seeing enormous interest from our investors in the creation of fixed-income assets that provide a high yield, yet benefit from also quite a high level of security. And that type of demand we’re seeing primarily for investments into intellectual property type risk. That’s a market that has taken off tremendously over the past year and a half,” said Eng.
“We are also seeing a lot of interest from our investor base in offering premium finance, commission finance, etc. So, there’s enormous appetite from investors that are looking to pick up a nice and higher yield from investments that aren’t correlated to market risk. With market risk I mean both equity markets, as well as the credit markets. And also not necessarily correlated to insurance risks that are already taken within the property cat sector,” he continued.
The live webcast also featured Hedwige Nuyens, Managing Director, International Banking Federation, who provided some insights from the banking world.
“We all know that the banks are loaded with deposits right now. During the COVID period, actually, the level of deposits amongst banks grew enormously. So that means that banks are looking for the right kind of investment, and as Mattias said, rightfully, banks want to diversify these investments.
“So, they know they have a credit risk portfolio which is very important, they know they will have to unbound climate-related investments. So, this type of investment that is insurance related but different from what the classical credit risks are representing or climate risk, could really be an opportunity. Albeit, of course, subject to transparency, subject to what Yannick was saying; What about the data available? What about rating agencies? So these are important things as well but definitely, I think, there is a momentum,” she said.
Sam Gaynor, Co-Head Financial Services Practice, Altamont Capital Partners, told the audience that his firm, which owns a portfolio company in the life and annuity space and a separate portfolio company in the commercial line space, talks about ILS a lot.
“Because on one hand, from a cedent perspective, as owning a primary insurance business, ILS capacity I think will be a growing component of our reinsurance stack, both given the flexibility in what should be attractive cost of capital. And on the risk taking side, talking about it with our life insurance business relative to where fixed income yields are today, and relative to the much more attractive risk profile that a diversified book of P&C business can have. Especially as we’ve talked about in the casualty space or in the commercial line space more broadly, where there’s just been less ILS penetration,” said Gaynor.
Adding that “It’s a very logical place for expansion for the industry.”
Gaynor feels that this is something that should continue to grow over the coming years, but stressed that there are reasons why it hasn’t happened thus far.
“But my hope is that over the next coming years and through some of the technology that’s being developed that allows for greater risk transparency, adoption will continue to broaden,” said Gaynor.