SCOR CEO on wildfire risks: Quantity of ILS will only increase with quality of the modelling

Speaking this morning during the SCOR earnings call, CEO Thierry Léger commented on the potential for wildfire catastrophe bonds to support European re/insurers, saying that the quantity of ILS will only increase with the quality of the modelling and as there is greater understanding of the influence of climate change on the wildfire peril.

Léger was asked about whether the market could see wildfire insurance-linked securities (ILS) issuances, similar to what has been seen for Californian risks.

He replied, “The answer is yes. It’s definitely an option. I think it’s not an easy risk to cover through ILS. It’s very difficult to come up with models for fires. The models are very little-developed today, and to do ILS type of covers you really need reliable models.

“Accordingly, I expect there will be attempts. There will be smaller issuances here and there, but the quantity of ILS issuances will increase only with the quality of modelling and with a bit more experience around climate change and the impact it has on wildfires.”

Léger went on to say, “I mean, we really over the last five years see an explosion in wildfires. I think the load for our clients, the insurance companies, has become really large on anything related to climate change. So I’m speaking hail, flood, wildfires, mainly the three. The loss load has become remarkable for them.”

But clarified that he feels there is ample limit available for the wildfire peril in the traditional market, although noted that diversifying capacity sources is always beneficial.

Saying, “I do, however, think there is no shortage of capacity really for wildfires. So there is no particular need for ILS.

“However, it’s very I would say logical that you try to develop other sources of capacity than traditional insurance, for example. So it seems only logical.”

Philipp Rüede, Group CFO of SCOR, also explained that there is a reason California wildfire risk is a peril in the catastrophe bond market.

“On the ILS side, typically what goes to the capital markets is really the peak of the peak, and it tends to be the more remote type of covers. That’s where the investor appetite is.

“You could say yes, wildfire in the US, there were a few transactions, but it’s mostly because of the size of California, and that it has some diversification benefit within the ILS market.

“But I would say, I would join Thierry in saying that that’s probably not where you would expect a lot of growth to happen,” Rüede stated during the earnings call.

Going on to say that attrition is where this peril is hurting re/insurers in other regions, “Typically the cat bond market, ILS, would play in the range of you know one in 50 years, one in 30 years, so events that are very rare, but very severe and that you would have in California these kind of events.

“But I think what the insurers are really struggling with is more the impact on their earnings. So much less remote scenarios.”

CEO Léger then highlighted how the cat bond and ILS market currently still remains largely focused on the peak perils as well, while also highlighting his own firm’s activities in the market, through its SCOR Investment Partners division.

Léger said, “It’s obviously a tool that we reinsurers use for ourselves and SCOR is also offering investments into ILS through the funds that that we have. So we’re one of the leaders globally in that field.

“But you basically have three buckets, right? The first bucket is the preferred one, or the like big exposures in the world, U.S. wind, earthquake Japan, earthquake in California, wind Europe. So those that’s the big one, that’s the big bucket. That’s where most of the ILS is.

“Then you have the middle bucket, which is what Philip referred to, it’s smaller type events, more in the frequency. It’s not easy to find a lot of capacity in that area. But there are always attempts to create a market.

“Then there is a third pocket which is rarely in the ILS market, which is more traditional types of reinsurance. You know, motor liability, or cyber. These are really very smallish type of areas that are very difficult to transfer to ILS.

“So what we should always bear in mind, is that ILS plays in a kind of niche of the of reinsurance space.”

A key driver for increased issuance of wildfire catastrophe bonds in recent years has been the improvements seen in risk models for the United States, particularly focused on California.

As risk models improve for other regions, including Europe, we could see a growing use of ILS structures to transfer some of this notable exposure (evidence by this year’s ongoing wildfire events) to the capital markets in time.