The base of insurance-linked securities (ILS) investors that are interested in casualty, or longer-tailed P&C reinsurance risks, is expanding, according to rating agency AM Best, who noted increasing interest in the non-catastrophe segment of the ILS market.
Of course, there has been a lot of discussion about expanding the ILS asset class into longer-tailed lines, or even into shorter-tailed specialty classes of reinsurance and this has been a perennial topic of discussion for some years now.
But over the last two years there have been an increasing number of initiatives, focused on casualty as an ILS line of business, as well as more broadly on non-catastrophe property and casualty business, that encompasses the shorter-end of the casualty class of risks.
Casualty risks are actually not that new a proposition to the ILS market, with the first known deal having been a now infamous casualty catastrophe bond named Avalon Re Ltd. from 2005.
That deal defaulted after a number of qualifying loss events that affected sponsor Oil Casualty Insurance’s portfolio.
We saw the first tentative casualty ILS deals coming to market around 2015, through 2017, but these were either very bespoke bilateral deals, often with an investor involved that wanted an asset play as well as the risk, or run-off focused portfolio deals.
Over the last couple of years though, the focus on casualty risks has increased and tech-focused companies like Ledger Investing and Vesttoo now target bringing structured non-catastrophe P&C insurance exposure to capital market investors, while other major reinsurers have adapted their third-party capital management strategies to also focus on longer-tailed lines of business.
AM Best explained in a recent report that, “Diverse industry players such as traditional reinsurers, insurtech companies, and longtime ILS investors believe there is an opportunity to transfer casualty risk to the capital markets via ILS transactions.”
The rating agency believes that interest in casualty, or non-cat ILS, is expanding to more areas of the ILS investor base.
“Typically, casualty ILS investors are composed of family offices or similar entities with a longer investment horizon, but interest from other types of investors has grown, suggesting that the investor base may be broadening,” AM Best explained.
The rating agency added, “The types of casualty risks in ILS transactions span a broad spectrum of lines of business, including automobile liability and physical damage, general liability, and workers’ compensation. Generally, short- and medium-tailed lines with three- to five-year durations are targeted for inclusion.”
Going on to explain that, “Because many casualty lines have tails that extend beyond that timeframe, a well-defined commutation mechanism is needed to conclude the transaction at its legal maturity.”
It’s yet to be seen how much appetite the existing ILS investor base will ultimately have for longer-tailed, non-catastrophe lines and casualty risks.
The real expansion here may come through structuring innovation and developments that allow non-cat risks to be exposed to different types of investors, which ultimately could result in innovation that also helps to drive forward the broader ILS market as well.
A lot of the work going on in the non-cat ILS arena seems to have a focus on bringing in different types of capital market institutions and finding ways to leverage different investors’ appetites, on asset and liability sides of the trade.
Over-time, as non-cat and casualty ILS activity increases, this could have the effect of introducing more classes of investors to ILS as a whole, while any structuring innovation may also be applicable to the broader ILS market, helping it to expand its investor base again.