Low correlation of ILS more important than ever: Millette, ILS NYC 2021


The insurance and reinsurance industry’s relative lack of correlation with broader financial markets is now more important than ever before, Michael Millette explained at our ILS NYC 2021 event.

Michael Millette, Hudson Structured Capital ManagementMillette, the Founder and Managing Partner of specialist investment manager Hudson Structured Capital Management explained why ILS and more broadly insurance and reinsurance, are assets with qualities that during a session held on Monday from the fifth annual Artemis ILS NYC 2021 conference, which this year is being held virtually and online.

He joined us to discuss his views on the forward-looking development of the insurance, reinsurance and insurance-linked securities (ILS) market, as well as how capital use may change within it.

In particular we discussed topics relevant to the fact Millette believes this industry will change more over the next decade than it has in the last 70 years.

On insurance-linked securities (ILS) and its future development as an asset class, Millette said that right now the relative lack of correlation, inherent in many insurance and reinsurance business lines, is more important than ever before.

He explained, “Investors have been concerned about correlation for decades. Technology and communication have caused the capital markets to spin faster and faster. If we start out with the collapse of the Bear Stearns mortgage funds and end up with the collapse of Lehman Brothers, that ran from July or June of 2007 till September of 2008. The onset of correlation and destruction of the markets took over a little over a year.

“From the time that coronavirus started to spread in mid January, until the time that essentially all markets collapsed in early March was just a matter of weeks.

“The next crisis will be a few days. We will see markets around the world cascade.

“So, non-correlation is more important than it was, so this quality of the insurance market is more important than it was.”

However, while the ILS asset class, as well as insurance and reinsurance, now finds itself in increasing demand due to the non-correlation investments in them can offer, there is another side to correlation where Millette feels the industry has more work to do.

This is in capitalising on the non-correlation that is inherent between different insurance business lines, which Millette feels has been a missed opportunity for the ILS market.

“Not only is the industry not well correlated with the broader capital markets, but the industry has dozens of sub-sectors that are not well correlated with each other,” he said. “Longevity risk is not well correlated with cat risk, is not well correlated with D&O, which in turn is not well correlated with marine and energy, which is not well correlated with casualty run-off.

“So, that is just dazzling, to be lightly correlated and then to have non correlation internally. That is exciting.”

Millette believes that a range of factors are set to drive change, but also opportunity for the insurance, reinsurance and ILS sectors.

On the ILS asset class, the fundamentals remains strong and Millette explained that these original drivers for the creation of the ILS market will continue to propel the segments progress forward.

“The factors that made the whole enterprise interesting in 1996 are if anything more important in 2021 and I expect they will be more important still in 2031,” Millette said.

“Non-correlation is going to become steadily more important.”

He expanded to say that low-interest rates will continue to drive investors to alternatives, with a reasonable prospect at this time that rates remain lower for much longer.

“We could go through a period where the yield is really compelling,” he explained.

In addition, the use of technology, not least in risk modelling, remains a key driver for future ILS market growth and success.

“The fact that there is pervasive and engaging modelling available in so many parts of the industry is important and computation and tech are going to empower that modelling, especially as data recovery is going to refresh and nourish models more speedily,” Millette said.

Before summing up, “The industry will continue to be important in CAT and it’s going to appear across more sectors. There are new companies appearing that have no particular connection with the traditional folk-ways of the industry. So I think that we will see steady growth in the capital markets for reinsurance over the next ten years.”

The session, which was broadcast first to event registrants on Monday 8th Feb, can now be viewed below:

Every session from ILS NYC will be made available more broadly via our Artemis Live video channel and audio versions will also be shared via our podcast as well.

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