In spite of a challenging few years for both managers and investors from across the insurance-linked securities (ILS) space, the Co-Chief Executive Officer (CEO) of Markel Corporation, Richie Whitt, remains optimistic on the future of the market.
In a wide-ranging discussion with the CEO of Aon’s Reinsurance Solutions division, Andy Marcell, as part of the broker’s series of fireside chats with industry leaders, Whitt shared his views on the ILS market on the back of some challenging years and the more recent impacts of the ongoing Covid-19 pandemic.
Regarding the coronavirus outbreak, Whitt explained that during the initial shock the majority of investors, which typically only allocate around 1-2% of their investments to ILS, were more focused on the other 98% that got “clobbered” in the financial markets.
“As things started to recover people could start thinking about the 2% again, and so conversations picked back up around ILS,” said Whitt.
Prior to the arrival of a global pandemic, the ILS sector had endured some testing times as high levels of cat losses exceeded expectations for consecutive years, and many experienced the well-documented trapped capital issue for the first time.
“I think ILS, obviously it’s been tough the last four years, I don’t think anybody would argue that,” said Whitt. “But, I just believe ILS makes so much sense in the long run, because cat risk in particular belongs in the broader financial markets where it can be fully diversified out.”
One of the attractive qualities of ILS and why it’s performed so well as an asset class during global crises, such as the 2008 global financial crisis and the current pandemic, is its lack of correlation with broader financial market turmoil given its strong focus on the property catastrophe risk universe.
Speaking with Marcell, Whitt emphasised the asset classes’ “very, very low correlation”, and again stressed that it makes sense for that risk to be in the broader capital markets for diversification benefits, but also to provide a benefit for those capital providers.
“So, I’m incredibly bullish on the long-term prospects of ILS. And, I do think ILS markets will continue to diversify and not just be reinsurance,” continued Whitt.
As Whitt went on to explain, an example of this can be seen with Markel’s Nephila Capital, the largest ILS and collateralized reinsurance manager in the world, who a few years ago starting moving closer to the risk and now writes a fair amount of insurance.
“Again, that’s an element of diversification. As we know, not all parts of the market move even in the same direction or at the same pace. And they saw that insurance pricing was improving quicker than reinsurance pricing, and so more capital has been allocated to insurance, and consequently less to reinsurance in recent years,” he said.
Adding, “That could change tomorrow and, they’ve created the optionality to be able to allocate capital where it has the most attractive returns in the market.”