Next wave of climate ILS products in focus at Nephila Climate: CEO Rapin

With the world attempting to speed a transition to lower carbon economies and the key Conference of Parties (COP 26) beginning at the end of this month, it was interesting to hear Maria Rapin, CEO of Nephila Climate explain that a key focus for the company is now on product development.

Nephila Climate is the weather and climate risk and reinsurance focused unit of the largest insurance-linked securities (ILS) fund manager Nephila Capital.

While the ILS and reinsurance focused investment manager has long been entering into climate focused risk transfer, the Nephila Climate division that was launched in 2018 has a remit to create new climate insurance-linked securities (ILS) solutions and innovate in climate risk transfer.

Speaking during a panel discussion moderated by Dominic Christian, Global Chairman, Reinsurance Solutions at Aon, Nephila Climate’s CEO Maria Rapin explained that her focus is on the next wave of climate risk transfer.

Providing some background, Rapin explained, “The catastrophe market is well established and that’s where Nephila has its roots, in providing catastrophe products.

“Now, we’re having to think a lot through what’s going on, in market dynamics more broadly, but also as climate change is a big topic and what’s happening there.

“Our investors are saying, we know how to invest in equity and we know how to invest in the debt markets in order to have an impact, but risk transfer has a role too.”

All of which means that, “Thinking about the wave of new products, that’s where we’re focused in the Climate business,” Rapin said.

Encouraging protection buyer uptake of weather risk transfer products has always been challenging, even with the weather derivatives market now more than 25 years old.

While climate change and related risks, as well as growing volatility within certain weather perils, has also been understood for a long-time, the uptake of climate risk transfer products has also been a little slow to get started.

But increasingly the focus is shifting from purely buying protection against the most visible threats of climate change, like sea-level rise which has always been a difficult sell, to risk transfer and hedging tools designed to smooth weather and climate related volatility in results, or to products that can carve climate risk exposure out of portfolios of physical or financial assets, the conversation has shifted and traction is increasingly being made in the kind of marketspace Nephila Climate is creating for itself.

Rapin continued, saying regulation will be a factor in driving uptake of climate risk protection.

“Our job is to manage volatility, and some of the new projects coming into place, or some of the transition that’s happening, has associated volatility and needs risk management around it in order to attract more financing,” she explained.

Adding that while, “It’s compulsory right now to purchase catastrophe insurance, hurricane insurance, if you have a mortgage in Florida, that compulsory element hasn’t been there so far on the climate side, even though we know that the risk is out there and it exists.

“That’s starting to change in the regulatory environment, but also as there’s more pressure from investors, shareholders and stakeholders to do something.”

As a result the product-set needs to change and so product development is a key focus for Rapin and the Nephila Climate team it seems, as they target creating the next wave of climate ILS products and investment opportunities.

“As these economies transition, and everyone’s starting to see the opportunity that also exists around this, there’s a natural need for risk transfer to evolve with it,” Rapin said.

Continuing, “The insurance industry traditionally operates in one-year contract terms, but some of these solutions require taking a longer view than just one-year and really thinking about what the insured need is on the other side and how do we respond to what those needs are.

“Things are changing so it requires creativity a lot of the time to work with them. There is huge opportunity and innovation happening and we get to come to work every day and think about how to innovate around that too.”

She went on to explain that on the investor side of ILS, allocators are constantly asked by their boards, by their pensioners and their investment committees about climate change and how it could impact their entire portfolio.

Which is relevant for Nephila in managing and communicating with its own institutional investor base, but also presents opportunities for the ILS manager to put its expertise to work in helping investors understand the risks they may be holding.

“I think there’s a role to play in measuring what’s in the portfolio that we’re building for investors and helping them understand how climate change is relevant to the portfolio that we’ve constructed,” Rapin said.

But she added that, “They’re also coming to us to help them understand how climate impacts the rest of their portfolio, because they have real estate, infrastructure investments, and they’re trying to understand what the impact is there.

“So it’s interesting now to see that a lot of them are getting up the learning curve in a hurry and these conversations are getting deeper and more interesting.”

All of which also suggests one area that a new wave of ILS products and investment opportunities could emerge, through ILS managers like Nephila putting their expertise to work in helping major institutional investors to measure, manage and transfer climate risk that is embedded in their broader portfolios of more traditional assets.

Too often, when it comes to climate discussions in ILS, the focus ends up being on asset gathering from the institutional ESG community, when the real opportunity is to provide the product-set that enables climate risk to be transferred efficiently to the capital markets, which would in turn result in ESG allocator inflows as that product would be a particularly attractive opportunity for many investors.

In order to satisfy ESG investor appetites you’ve really got to have ESG quality portfolios of risk to offer them as investment opportunities. Hence product-first is a good way to embrace the challenges and opportunities of climate risk in the ILS market.