Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Third-party models assist ILS market liquidity & validation: Don Mango, GC


Don Mango, Vice Chairman, Enterprise Analytics at Guy Carpenter has stressed the importance of third-party risk models in the insurance-linked securities (ILS) space, citing the added liquidity it brings to the market.

Artemis wrote recently how ILS market participants debated the necessity of third-party, independent risk modelling in an ILS transaction at the 2016 SIFMA IRLS conference in New York; discussing the benefits risk analysis disclosure brings to investors in the space.

At the same event, but as part of a separate panel discussion, Guy Carpenter’s Mango underlined the necessity of independent modelling within the growing ILS and cat bond space.

“It’s hard for us to overstate how important it is to have third-party vendor models for catastrophe risk, and how that facilitates the liquidity that we all enjoy.

“As in-built independence, it’s an avenue for the science to get in and add transparency, and even market validation just through repeated use and scrutiny,” said Mango.

The more comprehensive the information an investor receives for an ILS deal the more transparent the asset class becomes, while serving to strengthen investor confidence and comfort, something that’s important for the growth and maturity of any asset class.

Some interested in the ILS space could see third-party risk modelling as an unnecessary cost, or inefficiency, particularly for investors that are returning to the sector and investing in the same risks and the same locations as before.

However, Artemis published commentary from ex-Head of Insurance Capital Markets at AIG, Samir Shah recently, who explained that the question of risk analysis disclosure should focus on how to make this more efficient and reliable, suggesting that a requirement for risk modelling in an ILS transaction is clear, but perhaps the execution could be better.

On a need for independent risk analysis, fellow SIFMA panelist Richard Godfrey, Senior Investment Analyst, Securis Investment Partners, shared the view of Mango, saying that he disagrees with everyone that feels risk modelling in ILS is becoming less important, “I think it’s extremely important,” said Godfrey.

“From our perspective, as a fund manager, liquidity is paramount, it’s the capital that’s had independent verification, and risk modelling,” continued Godfrey.

As made clear by Godfrey and Mango the liquidity of the ILS market is of a great benefit and value to investors and managers in the space alike, and is driven by increased transparency, which is a result of risk modelling, among other factors.

And, as increased transparency contributes to greater market liquidity, meaning that more trading activity will occur in an asset class where investors have a better understanding and knowledge of the underlying risks, it’s easy to see why some ILS participants view third-party, independent risk modelling as a vital part of the market.

From discussions at the SIFMA event in New York during February 2016, it is apparent that ILS funds, managers and investors see the value in third-party risk analysis.

A strong benefit of the traditional 144A catastrophe bond market, which comprises a significant portion of the ILS space, is its market transparency and resulting liquidity, all of which would unlikely be at a place it is today without some kind of risk modelling.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis London 2022 - Insurance-linked securities conference in London

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