It’s down to insurance-linked securities (ILS) cedents and sponsors to work to restore trust in the ILS investor community, by increasing transparency, reducing uncertainty and building long term partnerships, according to Mathieu Halm, Head of Retrocession and Strategy at CCR Re.
Halm recently discussed the challenging year that the insurance-linked securities (ILS) market has faced, despite coming through the pandemic reasonably unscathed.
“However, some special purpose vehicles will obviously be adversely impacted by the consequences,” Halm said of the COVID-19 pandemic, which means “This will prompt investors to pay greater attention to the description of ceded risks.”
Investors are becoming increasingly questioning of the risks they are assuming and as a result the sponsors, or cedents, need to take some responsibility for rebuilding their trust, Halm believes.
He continued, “It is the responsibility of the sponsors, the cedent, to ensure efficient management of this uncertain portion of losses whether incurred by Covid-19 or by the difficulties of forecasting and anticipating an explosion of costs such as those related to repairs and/or reconstruction in the wake of a natural disaster.
“After several years of high claim costs that held captive a significant portion of collateral invested in the ILS market, it is only by applying this type of expertise that cedents will be able to restore trust in investors.”
Trust can be rebuilt if the market embraces best practice and transparency, helping investors to have a much greater understanding of the risks of investing in insurance-linked securities (ILS).
Halm explained, “Trust can also be forged through transparency. To this extent, it is important to play a pedagogical role with respect to risk so that all or a portion of collateral may be trapped. Ultimately, this brings us back to the fundamental concepts of underwriting.
“Among other criteria, underwriting takes into account the quality of the business relationship and recognizes the cedent’s teams for their capacity to underwrite a high quality portfolio, to manage its aggregates and to handle its claims. As we all know from experience, trust is difficult to obtain and very easy to lose.”
Building long-standing relationships with the investors in ILS instruments and programs is another way to rebuild trust and also make it more sticky as well.
Bringing investors into the heart of a ceding companies risk management arrangements and ensuring there is an understanding and alignment of incentives can help in this respect.
“One source of differentiation for sponsors consists of offering their investors a long-term partnership and avoiding the use of a short-term opportunistic approach based on the arbitration of different risk transfer mechanisms,” Halm said.
Adding that, “In fact, becoming involved in the cedent’s middle or long-term risk management strategy facilitates the task of aligning the investors’ interests with those of the sponsor. One should not forget that reinsurance is a long-term industry. Consequently, investors value the capacity of cedent’s to prevail consistently through the cycles.”