The increasingly sophisticated base of investors in the insurance-linked securities (ILS) universe are eager to push the market forward, but there are some forces holding back greater demand, according to industry experts.
A week ago, Artemis and Vesttoo collaborated on a live webcast which examined opportunities for investors to access insurance asset classes, with a focus on high frequency, low severity business.
Overall, the message from panellists was positive and suggested that there’s tremendous demand for insurance and reinsurance-linked returns from across the risk spectrum.
“When the ILS market started, the big idea was essentially the buying of cat bonds and investing in cat bonds. Then the market moved on to being much more about fronted reinsurance, and that was next step in the ILS journey,” said Mattias Eng, Head of Insurance Solutions, Securis Investment Partners LLP.
He went on to note that both cat bonds and fronted reinsurance arrangements are two products that are well understood and liked by investors. Now, however, “they’re very much looking for what is the next step in the ILS journey, and they are very interested in conversations about how they can access new types of risks in a new format.”
According to Eng, demand for these types of product is high and investors are very willing so long as it comes to them in a sensible format. The final point, said Eng, is to an extent what is holding back the ILS market from its next phase of growth.
“For a market to be accessible to ILS investors, the transactions need to have shorter as well as defined maturities, and also very importantly, the risk needs to be capable of modelling.
“Yes, there’s tremendous demand from investors for new and uncorrelated risk, what is holding that demand back, is the lack of specific product that is accessible to ILS investors,” said Eng.
Expanding on Eng’s comments around opening up the ILS sector to more investors, panellist Sam Gaynor, Co-Head Financial Services Practice, Altamont Capital Partners, agreed that duration certainty has been a major issue for some.
“For the industry more holistically, having legacy solutions that can sit behind ILS vehicles and become smart about the risk that they’re taking, I think, is something that ultimately should develop more and more.
“That would enable classes that are not property cat to come in and write longer tail lines of business, but only beyond a period of time that works for their investment mandate,” said Gaynor.
Interestingly, Gaynor also highlighted the importance of data and specifically the fact that as a risk bearer, the amount of data that you can ultimately end up with has been a real problem.
“And, so, when you think about the value of a diversified portfolio and being able to very accurately model your volatility, correlation to other asset classes – assuming you’re an institutional investor investing into ILS. That’s been, I think, fixed over time with some of these technology platforms that are enabling better intake up front, and then analysis along the way that can feed into more accurate modelling.
“That ultimately will give more comfort to new capital coming into the ILS world that previously just couldn’t get there with the amount of data that was available to them, or the accuracy of it,” said Gaynor.
On demand, Yaniv Bertele, Chief Executive Officer (CEO) of Vesttoo, told the audience that he is seeing diversified opportunities for new capital providers all across the board, in both life and P&C.
“But if I would have to choose a few; we’re seeing increased interest in pandemic-related hedges, those could actually be business stop hedges measured against increased mortality. Event cancellation. We do see product liability hedges required due to supply chain issues, as well as excess mortality,” said Bertele.
Adding that longevity is also becoming a growing issue, alongside interest in motor liabilities, homeowners general liabilities, collateralized IP protection, and also commission protection.
“The lowest hanging fruits are definitely the P&C deals, the motor claims, and the general liabilities. The growing segments on our portfolio are definitely longevity, both for reinsurers and cedents themselves,” said Bertele.