Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

London market differentiation increasingly attractive to ILS capital


Speaking to insurance-linked securities (ILS) funds and investors in 2022, the London insurance and reinsurance market is seen as a venue where deploying capital to access differentiated insurance or reinsurance-linked returns is increasingly attractive, but still ease of access is cited as a problem.

london-market-insurance-reinsuranceThe insurance-linked securities (ILS) community is gaining increasing levels of comfort over London market profitability, helped enormously by the work that has been going on in the Lloyd’s marketplace in recent years.

Lloyd’s efforts to improve performance, by restricting underperforming writers and allowing growth only where it is “to plan”, is (alongside global pricing trends) seen as having changed the prospects of the market, from one where underwriting results were regularly below expectations, to one that capital is now attracted to again.

In the main, analysts are forecasting a strong year for London market underwriting results in 2022, buoyed by hardening reinsurance and specialty insurance rates, as well as improving casualty pricing and with a significant opportunity seen in cyber.

For the insurance-linked securities (ILS) market, after challenging years of catastrophe losses and with rising awareness of the need for climate risks to be priced in, there is a developing and increasing focus on differentiation, which will be a key topic of discussion at our upcoming New York conference, now held April 22nd.

Investors are looking to identify additional routes to deliver insurance-linked returns, outside of pure property catastrophe risks.

At the same time, ILS fund managers are exploring new strategies that will stray outside of the traditional property catastrophe reinsurance that is most familiar in ILS.

The search for diversification within insurance and reinsurance has been a perennial one for the ILS market.

In the past, diversification has largely focused on new classes of business. On trying to find the catastrophe like in non-catastrophe lines.

But now this is expanding to a search for differentiation in ILS.

So, generating differentiated sources of return from insurance and reinsurance markets, be that via different risk classes, different access points and mechanisms, different structures or structuring, risk transfer product design, leveraging technology and analytics to make differentiated risks more palatable to ILS investors, and even using differentiated sources of capital.

The London market is seen as a location where specialty lines of business are written in the highest concentration, hence accessing differentiated risk-linked returns from the London market and Lloyd’s is seen as increasingly advantageous, especially in a market where pricing has firmed considerably.

2022 is seen as a year where London market writers should be able to deliver strong profitability, large loss activity around the world allowing. That’s making it a focus again for many, especially large end-investors in ILS that have the ability to engage more directly with those writing it.

But, with all the discussion of challenges in property catastrophe reinsurance and retrocession, both large investors and ILS fund managers have increased their focus on specialty and other lines in recent years, resulting in some plans to begin underwriting these types of risk, largely short-tail, as well as some launches of dedicated vehicles (such as in the case of Nephila’s new syndicate).

But, accessing these returns from the London market is still seen as more complex, difficult and usually more costly as well, especially if you want to access them as directly as possible, which might mean establishing underwriting vehicles or syndicates in Lloyd’s, or its vicinity.

Sitting at the end of the chain, to allocate to a reinsurance or retro program for a London market focused underwriter, is one way of achieving this access.

But, when it comes to specialty, casualty and other areas of reinsurance, ILS investors want to be far more selective. So purely participating in reinsurance program panels is not always deemed as attractive.

Most in the ILS community recognise the need for a more selective, or bespoke approach, when it comes to venturing outside of catastrophe risks, to construct portfolios and strategies that deliver what investors are looking for without too much of the tail.

Either by choosing top-performing underwriters to partner with, often a quota share approach, or by having the resources and partnerships that enable a far more selective and even origination-driven strategy to sourcing risk.

Which makes entering these kinds of markets a slower affair and we’re told it can be slow no matter what route you consider taking.

Establishing Lloyd’s syndicates, even the new syndicates in-a-box, can be costly and a lengthy process.

Working with the new Lloyd’s ILS structure, London Bridge Risk PCC, is also not as fast a process as you might have thought.

We’re told some of the arrangements that have been announced so far, where ILS investors have backed underwriters via London Bridge Risk PCC, took a considerable length of time to establish, especially when you consider these are a relatively vanilla quota share arrangement.

Sources tell us that it’s expected the process will become faster (discussions with regulators to speed ILS in the UK are ongoing) and we also understand that Lloyd’s has plans to extend the utility of London Bridge Risk PCC as well, to offer more options to investors than just entering into a simple quota share reinsurance arrangement with a Lloyd’s member (excess-of-loss is said on the agenda).

But, for ILS fund managers that want greater ownership of their origination and want to access London market returns as soon as possible, to benefit from pricing trends, right now, bespoke partnerships with underwriters seems a preferred approach.

ILS investors and ILS fund markets can offer one thing that underwriters of differentiated classes of risk appreciate. Efficient capital, often coming at a lower-cost and generally in abundance as long as the economics are right and it can be deployed.

That’s attractive to underwriters in the current marketplace, offering a way to partner with capital providers that can help to fund growth, while relinquishing a share in the economics of that business.

In the hardening market that is being seen across many specialty and casualty lines of insurance or reinsurance, partnering with efficient capital to drive growth can be a strategic win for those who don’t want to dilute equity, or rely on their traditional capital providers to expand their underwriting footprint.

We wonder whether, in time, the London Bridge Risk PCC could become a venue for sidecar capital to support Lloyd’s market growth.

It’s also possible we’ll see some product innovation, to develop new Lloyd’s capital friendly risk transfer, reinsurance and retrocession solutions that extract risk-linked returns from that specialised underwriting marketplace.

At a time when the underwriting economics look so improved, while capital is increasingly exploring its options, it is natural to assume the focus on differentiation will continue.

Which means the focus on easing access to markets like Lloyd’s will only continue, as investors and ILS fund managers seek reliable sources of differentiation, ultimately benefiting the underwriters and ILS capital providers as well.

Register here and join us at our New York ILS conference on April 22nd to hear more on differentiated ILS strategies.

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