The arrival of a global pandemic accelerated transformations already taking place across the re/insurance industry, which in turn has created an opportunity for certain insurance-linked securities (ILS) market participants to play a greater role, according to Luca Tres, Partner leading the global life origination and structuring efforts at Securis Investment Partners.
In an exploration of how the pandemic affected the life ILS market, Artemis spoke with Tres to gain an insight into both the impacts of the crisis, the general trends and the reaction of managers in the space.
To start, Tres stressed the importance of taking a broader view to this than just the pure ILS space and to consider what’s happening more generally across the insurance and reinsurance markets.
“COVID 19 just accelerated a stream of changes that were already making waves in the insurance space,” said Tres.
The most notable of these, he explained, are the flexible roles in the value chain, new entrants such as InsurTech and private equity; and also new structures.
On the first point, Tres noted that in the past there existed a fairly clear divide between policy distributors, insurers, reinsurers, and ILS funds, but the reality is that today, this is materially different.
“Insurance companies now try to reach out to customers as directly a possible, limiting distributors’ involvement. Reinsurance groups are now an important direct counterparty for large corporates,” explained Tres. Adding that in response, “ILS funds have been adjusting to this new reality where boundaries are all blurred.”
Highlighting the expanding grey area between traditional and alternative sources of capital, Tres told Artemis that on the life/health side of the business, “Still focusing on actuarial risks and staying away from market risks, Securis has been working with pretty much all actors involved in the insurance value chain, trying to offer them financing, derisking and capital solutions for their very different needs.
“The diversity of counterparties ILS funds will face will actually increase further over time,” he continued.
Increasingly, ILS funds are dealing with more and more new entrants in the space as well as greater appetite from existing non-traditional players such as private equity funds.
“They often bring a new culture to the space and they tend be much more capital focused than traditional players. As such, their DNA tends to lend itself well to the general trend of hyper-customisation of life ILS structuring we have seen in the market in the last few year,” said Tres.
Alongside private equity funds investing in insurance companies, Tres also noted the willingness of InsurTech players – which bring their own ideas, needs, priorities and different mindsets to life ILS – to participate in the space.
“They are already part of the target universe for some of the ILS players, however the bigger question is: how can life ILS help insurtech with their growth, still offering the decorrelated profile most of life ILS investors want? There is a multitude of ways and we are definitely going to see more of this,” he explained.
Last but not least, Tres spoke about the emergence of new ILS structures against a backdrop of expected higher volatility on the equity and credit front over the next 12-24 months.
“This volatility translates into regulatory capital impact and new structures are expected to emerge going forward exactly to help re/insurers strengthen their capital position if and when needed across both sides of the balance sheet.
“New (and often more complex) structures will be discussed and executed and the level of customisation will increase further. Rating and accounting are other extreme relevant topics that will attract more attention. Again confirming the shift we have seen in the last couple of years from public trades into private structures,” said Tres.
“Bottom line is that, for all these reasons, flexible ILS players with advanced structuring skills are expected to be able to play an increasingly more relevant role in the market,” he concluded.