Risk modellers respond to ILS investor needs: Ben Brookes, RMS


The growth of the ILS market in recent times has seen the needs and demands of investors in the space change, which has driven a need for risk modellers to respond to the evolution of the marketplace, according to Ben Brookes, Vice President of Capital Markets at RMS.

Despite a reported slowdown in the entry of alternative reinsurance capital since the beginning of 2016 when compared with more recent years, the insurance-linked securities (ILS) space continues to attract new and existing investors.

RMS’ Brookes describes the third-party reinsurance capital world as one that from a risk modeller’s standpoint continues to see broad and robust interest.

“And I think the needs of investors are changing as the contract forms are evolving,” said Brookes.

“We’re seeing more and more collateralised reinsurance contracts happening, and that’s obviously influencing how we then serve our clients in that marketplace as well,” he continued.

Private ILS transactions, which include the already mentioned and rapidly expanding collateralised reinsurance sector, sidecar ventures, cat bond lites, and other insurance, or reinsurance-linked investments, are expanding in utilisation throughout the re/insurance and ILS space.

As a result, risk modelling companies like RMS need to evolve and adapt to the changing needs of their clients in order to remain relevant to the industry they serve.

As the softening reinsurance landscape has persisted, the need for industry participants to improve discipline, efficiency, and relevancy have all become key features of navigating the testing market environment.

And, as highlighted by Brookes it isn’t just the insurers, reinsurers, and ILS funds/managers that need to evolve to the changing risk landscape and market environment, it’s applicable to all other parts of the entire distribution chain, which includes the risk modellers that are so widely used across the risk transfer world.

Innovation is vital to the evolution and progression of the ILS space, a trend that Brookes notes has resulted in his firm seeing increased issuance interest from local governments and state-backed agencies, “to think about risk quantification.”

“On the investor side, in terms of the ILS funds that we work with, people are thinking more and more about valuations in particular. So as well as risk, how do you understand return, and how can we help to do that with independence as well,” says Brookes.

On the issuance side of things, Brookes explains that innovation has potentially led to the catastrophe bond market looking at more resilience bonds. While such a deal is yet to come to fruition, the idea is that through a bond issuance the financing of risk reduction implementation is achieved.

Something Brookes says could be done with local governments, for example, “by enabling the investment in resilience mechanisms, through resiliency rebates.”

An idea that’s made more possible owing to the abilities of risk modelling firms to quantify exactly how they can provide those risk reductions in the first place, says Brookes.

Beyond the actual quantification of catastrophe risks and developing an understanding of how to structure catastrophe bonds, or private risk transfer solutions into the marketplace, so really the structural part of the risk transfer.
Risk modellers have needed to evolve with the changing and maturing ILS space, which sees investors demand a greater understanding of both the risks, and also how to manage their exposures themselves.

“If you are a portfolio manager it’s important to understand what the value of your portfolio is at a given point in time, and we can really help to quantify that, at that returns analysis as well,” explains Brookes.

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