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Growth to be more challenging in private ILS & sidecars: Twelve Capital’s Grandi


As the insurance-linked securities (ILS) market continues to reset itself after a number of years of heavy catastrophe losses, growth is likely to be more prominent in areas such as catastrophe bonds and top-layer peak peril strategies, that have displayed more consistent performance, Twelve Capital’s Marcel Grandi believes.

marcel-grandi-twelve-capitalDuring a recent interview with Artemis, around the Monte Carlo Rendezvous event, Marcel Grandi, Head of ILS Sourcing at specialist ILS investment manager Twelve Capital explained that some ILS products are likely to be an easier sell to investors than others.

Explaining the Twelve Capital outlook for ILS market growth, Grandi said, “We believe that growth will be more challenging for the private and sidecar market than for the cat bond market which performed in line with expectations over the last six years.

“Many of the private structures and features used pre-2017 as low attaching aggregates with no or small franchise deductibles, broad scope of coverage and ambiguous contract and collateral release language will continue to be out of scope for most investors.”

But not all private or sidecar structures will be so challenged it seems, as he added, “Certain structured sidecars have the potential to attract new interest.”

Twelve Capital, Grandi’s employer, believes there remain good opportunities in some areas of private ILS and reinsurance, particularly at the more risk-remote levels of peak peril towers.

Grandi pointed out that, “Twelve Capital is continuing with its top layer focused “peak peril” strategy providing fully collateralised retrocession support to select reinsurance companies in the event of shocks to regions heavily exposed to natural catastrophes. These risks are well researched and modelled and require the highest capital charge to our partners.”

Saying that, “Providing fully collateralised capacity is adding value to our partners and investors.”

In addition, Twelve Capital intends to maintain its focus on these areas of risk, where it feels the capital markets provide valuable capacity, while the risks meet investors appetites.

“Twelve Capital is not replicating the reinsurance model by using fronting entities and trying to over diversify in risks that are difficult to model and poorly priced, but is providing retrocession support as part of capital solutions provided through other strategies to the insurance industry as well,” he said.

Grandi believes that the peak catastrophe perils remain the best opportunity for investors in the insurance and reinsurance space as well.

Explaining that, “Financial investors in ILS are profiting from the diversification irrespective of the composition of the ILS portfolio. Peak natural perils ILS portfolios offer improved return premiums as compared to well diversified ILS portfolios often including inadequately modelled and priced risks. The focus on senior layers covering natural catastrophes in peak geographies as long as adequately structured and priced still offers good opportunities.”

On the topic of non-catastrophe risks and expansion to longer-tailed lines of insurance business, Grandi is not so certain the value for investors is as clear.

Saying, “Non-catastrophe areas are often facing the risk and challenge of the longer tenure (casualty), the complexity and time to determine the final loss (marine, energy) as well as the correlation with financial markets (cyber).”

But one area of real promise and where his employer Twelve Capital has an appetite to do much more, is in parametric risk transfer.

“Parametric solutions benefitting from a quick and transparent loss determination and settlement could experience an increased interest in the ILS market considering the painful loss adjustment and settlement experience with complex indemnity structures over the last 6 years. Parametric solutions have obvious benefits to ILS investors and can help to bridge the worldwide protection gap and increase resilience,” Grandi explained.

Going on to say that, “Structural enhancements as parametric solutions primarily in the cat area have the potential to expand the ILS market by helping to bridge the protection gap rather than the expansion into more complex business lines.”

Climate change is of course an area of focus at Twelve Capital, where much of its research and work with partners is focused.

Grandi sees the development of a trend where ILS managers are going to be able to differentiate through their expertise and insights into climate and also environmental, social and governance (ESG) factors, both of which are potential drivers for future ILS market growth.

“In the Nat Cat space the consideration of climate change and the assessment of climate impacts is crucial. Vendor catastrophe model output may need to be recalibrated to capture observed trends. Machine learning technology may be applied to estimate the expected shift in seasonal hurricane risk relative to long-term climatology. Climate model simulations may be used to assess the potential forward-looking climate impact on US hurricane risk.

“The analytical capabilities including a sophisticated ESG review of the underlying business will be a core differentiator,” Grandi told Artemis.

Adding that, “Twelve Capital is an advocate of impact investing and supporter of parametric solutions as a tool to reduce the protection gap while providing benefits as high transparency and quick loss settlement to investors.

“Twelve Capital has the ambition to be a leading market in parametric solutions with a global approach.”

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