ILS expansion beyond cat must be driven by pricing, structure, understanding: Doris, Twelve Securis

While the ILS market has moved beyond traditional property catastrophe risk and expanded into emerging perils such as cyber, casualty and specialty lines in recent years, Cahal Doris of Twelve Securis has expressed that this growth must be driven by pricing, structure and understanding, and not simply for the sake of expanding the market.

Speaking to Artemis around the reinsurance conference season, Doris, who serves as Chief Investment Officer ILS at the firm, outlined that Twelve Securis views the current ILS market as being very healthy.

However, he also stressed that the market’s resilience will always be tested following any major loss event.

“We would describe the market as very healthy. The cat bond market has continued to set records – in terms of issuance but also outstanding market with new sponsors entering the market,” Doris explained.

“Nevertheless, a healthy market is not simply one that grows. Ultimately, its resilience will be tested following a major loss event. Managers and investors therefore need to remain focused on liquidity, collateral management and portfolio construction even during favourable conditions.”

As highlighted, in recent years, the ILS market has expanded from traditional property cat risk and tapped into expanding perils such as casualty, cyber and specialty lines. However, it’s important to remember that while interest and issuance is growing, these non-peak sectors still represent a small fraction of the overall ILS market.

All of which leads Doris to highlight the importance that comes with expanding into these perils.

“We remain positive about innovation beyond natural catastrophe risk, but expansion should not happen simply for the sake of expanding the ILS universe,” Doris stressed.

He continued: “The fundamental question is whether a risk can be understood, priced and structured in a way that provides investors with adequate compensation. That is particularly important for longer-tail risks, where investors must accept significantly different liquidity characteristics from traditional cat bonds.”

In regard to cyber, Doris said that the peril remains particularly challenging given that it is a dynamic, man-made risk where historical data and traditional catastrophe modelling approaches have limitations, which leads the CIO to state that this view has been reinforced further through the advances that have been made with AI in recent years.

“Casualty presents a different challenge: its long-tail nature makes ultimate losses and reserve development significantly more difficult to assess. Broadly, investors will view short-tail natural catastrophe risk in a different allocation bucket to longer tail lines,” Doris added.

Given the ILS market’s rapid expansion in recent years, a number of challenges continue to exist within the space. One of which Doris observes centres around maintaining underwriting and investment discipline as competition for risk increases off the back of successive positive years.

The CIO also added that strong capital inflows can encourage investors to move further down the risk spectrum, leading him to say that “a clear communication channel with investors is necessary to allow managers to control risk while targeting suitable returns.”

Doris continued: “A second structural challenge remains the industry’s broad reliance on third-party catastrophe models. Most participants ultimately work from a relatively concentrated set of model assumptions. We believe managers need an independent view of risk that challenges those assumptions and incorporates evolving factors such as climate change.”

Highlighting key considerations that investors should be examining when deploying ILS capital, the Twelve Securis CIO emphasises that as the market continues to grow, investors should be looking beyond gaining access to transactions, given that access alone is becoming less of a differentiator.

“The key questions are whether a manager has the resources and expertise to develop an independent view of risk; whether it can process a significantly larger opportunity set without compromising investment discipline; and whether its interests are genuinely aligned with those of its investors,” Doris told Artemis.

He concluded: “Scale is valuable when it supports deeper analytics, technology, operational resilience and access across different segments of the market. But scale by itself is not enough. Investors should assess how those capabilities translate into portfolio construction and, ultimately, risk-adjusted performance.”

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