The insurance-linked securities (ILS) market’s product offering is particularly attractive at this time, helped by reinsurance pricing at higher levels and the significant effort that has gone into re-underwriting portfolios, Luca Albertini, CEO of Leadenhall Capital Partners explained to Artemis recently.
Speaking with Artemis, Albertini highlighted the fact that ILS portfolios are perhaps in the best shape they have been in for years.
“I believe that the current attractive risk and return profile of the cat market, coupled with the re-underwriting done in the sector, is likely to deliver profitable growth for investors in the space over the medium term,” Albertini said.
“The market and investors are now assessing the impact of Hurricane Ian to the ILS portfolios and to the general reinsurance market.
“Comparisons will be made with each fund’s loss with Hurricane Irma in 2017 and the relative performance taking into account the different level of insured industry losses.
“I believe in some cases the benefits of re-underwriting will be apparent,” Albertini said.
Adding that, “Hurricane Ian is already having a major impact on pricing discussions and with widespread evidence of an imbalance between supply and demand for cat reinsurance cover, we are now entering a true hard market, with the opportunities which such market conditions bring.”
In the current market environment, where returns are rising on the back of hardening reinsurance rates and the efforts taken to insulate portfolios against less-expected losses, Albertini of Leadenhall also feels having a range of products to offer investors will be key for ILS fund managers.
“At Leadenhall we have a number of ILS strategies with different risk and reward and different liquidity profiles. This means that first and foremost investors can choose a risk-return profile which fits their need and then be able to compare that with other opportunities with similar risk and return profiles,” he explained.
At Leadenhall Capital Partners, this also includes offering some differentiated peril investment opportunities as well.
Albertini noted, “We always look with interest at initiatives to expand ILS investments. More than half of Leadenhall’s business is in non-catastrophe lines as we have exposure to life and health and to some specialty lines.”
However, he has strong views on the expansion of ILS to new classes of business, stressing the need for a cautious approach when it comes to seeking out diversification within insurance and reinsurance.
Albertini explained, “Where I am a bit concerned is when the expansion goes into lines where there are lots of unknown unknowns (like cyber) or some casualty lines where underwriting margins have been compressed if not negative and now are particularly exposed to social inflation and legal risk on top of headline inflation.”
“All of these classes can be approached but I would see the need to see portfolio managers having strong underwriting skills in these classes to work alongside quantitative modelling,” he added.
Another area where Albertini believes caution is required, is in the trend towards algorithmic underwriting strategies, of which he is not convinced, as yet.
“I am still not sold on algorithmic underwriting and the recent underwriting performance from some of those who launched algorithmic underwriting with great fanfare some time ago does not make me feel that I am wrong in my approach,” he told Artemis.