The insurance-linked securities (ILS) investment industry is experiencing a shift driven by changing investor priorities and this is playing to the strengths of firms with deep expertise such as Hiscox, according to Vincent Prabis.
Speaking with Artemis in a recent interview, Vincent Prabis, the recently installed new Managing Principal for Hiscox ILS, explained that investors are now more discerning and seek out quality and experience, when selecting managers.
“We are currently witnessing a shift from the early ILS model, which focused on providing investors access to insurance risks, to a more holistic approach to owning the risk throughout the life of the contracts.
“Mature ILS investors not only require access to risk, but also expect the full suite of expertise that is needed to successfully manage a portfolio,” Prabis told Artemis.
He continued to explain that, at Hiscox, “Our dedicated underwriting team not only provides access to superior portfolios of insurance risks, but works alongside investors throughout the life of each contract.
“We aim to build partnerships with our investors that benefit from our actuarial, catastrophe modelling, negotiation, execution, valuation and claims capabilities.”
Prabis believes that through the strength-in-depth that Hiscox can provide, institutional investors can expect “superior portfolio construction, transparency and alignment.”
The timing of this shift is unsurprising, as investors have been reeling from repeat years of heavy catastrophe losses, with the resulting issues related to loss creep and trapped collateral all serving to undermine loyalty to managers and open minds to different approaches to accessing and managing reinsurance portfolios as investments.
“After another year of above-normal cat activity, there is a sense of ILS fatigue amongst some ILS investors. On top of disappointing performances, some investors have been frustrated by trapped collateral issues, often linked to poor levels of transparency on the claims process and little flexibility on the fronting arrangement. Even seasoned institutional participants are realizing that access to insurance risk alone is no longer a sufficient business proposition,” Prabis said.
Adding, “To ensure proper ownership of the underlying risks, investors now understand their ILS managers must have a direct handle on both the claims process and the fronting mechanisms. At Hiscox ILS, we are dedicated to placing our investors at the core of everything we do.”
Hiscox ILS benefits from claims support from its parent, as well as fronting capabilities that enable it to utilise its collateral more efficiently.
“This ability to be creative on the fronting side helps set us apart within the market, providing an end-to-end experience for our investors,” Prabis further explained.
Prabis sees a range of opportunities for investors in the space and believes it remains attractive to investors, although they are becoming increasingly knowledgeable and discerning.
“ILS as an asset class remains attractive due to the ongoing re-pricing and continues to deliver interesting and uncorrelated risk-adjusted returns. We are constantly reminding investors that it is difficult to approach this asset class with a “market-timing” mentality, but it is nevertheless easier to come in after large events occur, rather than before.
“At the moment, opportunistic investors are also looking at the retro sector where capital availability may become limited at 1/1.
“As a major participant in the sector, we will be well positioned to benefit from the opportunities that arise there,” Prabis commented.
The shift and shake-up that has begun in ILS is causing some investors to reassess their priorities, but improved reinsurance market conditions and still positive catastrophe bond performance are both serving to attract new capital as well.
Which makes Prabis positive on the ILS market outlook, feeling there are attractive opportunities for managers and investors to partner to construct performant portfolios of risk.
“Some participants are rethinking their involvement in the space. But we are also seeing increased interest, particularly from large institutional investors, in the asset class.
“This interest comes from experienced participants as well as newcomers to the space, both looking for a stable and transparent partner to help them build and grow their footprint in ILS.
“We believe ILS will continue to be a source of diversification and attractive risk-adjusted returns and are building partnerships with our investors to help them achieve their ILS investment goals,” Prabis concluded.