Although the last four years have been a challenging time for the ILS market in many ways, one positive development is that investors have become more discerning in their choice of fund managers, which could lead to the disappearance of “indifferent” funds, Quentin Perrot tells Artemis.
Perrot, who serves as Vice President of Willis Re Securities, recently spoke to Artemis about the state of the ILS market and the flight to quality that recent losses have prompted.
Asked whether he sees any potential for start-up opportunities to emerge in the alternative capital space, Perrot was doubtful about how much business would be available to new players.
“New ventures would be no bad thing, but ILS is by and large commoditised, with a sufficient number of ILS funds up and running,” Perrot told Artemis.
“Deploying capital is easy, so success arises from a fund’s ability to speak clearly and constructively to investors. No distinct approach can ensure success.”
But with that said, Perrot noted that many investors have now raised the standards to which they hold their ILS fund managers, following what has been in many cases a surprising loss experience.
This trend, he says, is likely to benefit shrewd managers and cause capital to be diverted away from “indifferent” funds, i.e. those that fail to properly discern between the risks they are selecting.
“Over time, indifferent ILS funds will either disappear or be growth-constrained,” Perrot said.
“A positive development over the past four years is the new ability, in the face of loss experience, to distinguish between ILS fund managers who knew nothing, and bought almost anything at almost any price, and those who were more prudent, more selective in their approach to risk,” he explained.
“Investors now want more regular reporting and robust modelling, and will be careful to not underwrite risks which they do not understand. Two years ago that was different.”
One way for funds to succeed might be an integrated approach where the ILS fund sits alongside a reinsurer with a rated balance sheet, the Willis Re Securities VP went on.
“This model is quite potent, and has not been stressed as much by loss events over the past four years,” he said. “It looks like it’s working.”
Capital has certainly been far more constrained in the ILS market this year as investors have taken time to re-evaluate their opportunities and look at how funds are being utilised.
Willis Re Securities has also used this time to take a step back and look at how best to help cedents access ILS capital in this changing space.
The firm continues to see cat bonds as a cost-efficient way to transfer retrocessional risk, Perrot said, and the broker is still providing analysis to assist with structuring programs.
“For cedants with growth objectives, a sidecar may work, but they can no longer be concluded in quite the same way,” he added. “Instead they must be approached as a partnership between a risk carrier and one or two investors who are aware of the limitations of the structure.”
Willis Re is also increasingly working with governments, pools, and supranational organisations to transfer risks to help build the resilience of populations, and is seeing further opportunities around pandemic mortality risk arising out of the COVID-19 pandemic.
“The same principles operate on the side of investors: we use analytics to help them understand the dynamics of risk and the most appropriate structures based on their return objectives, and lead them into suitable risk partnerships,” Perrot concluded.