Artemis Live - Insurance-linked securities (ILS), catastrophe bonds (cat bonds), reinsurance

For our latest interview, we were joined by Tom Johansmeyer, Head of PCS to discuss the issue of cyber risk and ask the question, why isn't it a bigger exposure in the insurance-linked securities (ILS) market?  For almost a decade, the subject of cyber insurance-linked securities (ILS), cyber catastrophe bonds and the ILS fund market as provider of cyber reinsurance, has been a topic of conversation at industry events around the world, our own included.  But years later, the ILS market's ventures in cyber risk remain relatively limited, to some bespoke transactions and exposure picked up silently from other lines of business. Why is that?  Tom Johansmeyer and I explored some of the reasons behind this. Asking questions such as does the ILS market even want cyber risk? Is a lack of data, risk models and industry loss events still a limiting factor? How big an issue are ransomware losses right now? What could catalyse the need for more risk capital? And, why is cyber reinsurance and retro so dysfunctional right now.

We recently hosted a webcast in partnership with Vesttoo, where the discussion focused on innovative approaches to insurance and reinsurance linked investments.  Our expert panellists discussed opportunities for investors to access high frequency, low severity insurance asset classes.  Viewers heard how the market for insurance and reinsurance linked investments continues to develop, with new routes becoming available to help investors access what is an expanding asset class.  Also discussed, were thoughts around how innovative approaches, such as pooling or asset-based collateralization, can enable asset managers to buy into these risks, earning spread from the uncorrelated risk of non-catastrophe insurance and reinsurance premiums on top of current yields.  Our panel guests included: Yaniv Bertele, Chief Executive Officer (CEO) of Vesttoo; Mattias Eng, Head of Insurance Solutions, Securis Investment Partners LLP; Hedwige Nuyens, Managing Director, International Banking Federation; and Sam Gaynor, Co-Head Financial Services Practice, Altamont Capital Partners.  Our industry experts agreed that the low volatility and projectable cash flows offered by high frequency, low severity perils in areas such as casualty insurance or reinsurance, are increasingly gaining attention from more experienced investors looking for relatively uncorrelated returns and higher yields.

We were recently joined by Christian Mumenthaler, Chief Executive Officer of one of the world's largest reinsurance company's Swiss Re, who discussed the state of the market, his outlook, the insurance-linked securities (ILS) market and what his priorities are for 2022 in this interview.  On reinsurance market pricing, Mumenthaler told us, "I’m really pleased that the industry overall has taken the right steps and we’re back into an acceptable area." But he warned of the need for rate adequacy to persist across reinsurance, saying that climate risks suggest further rate increases will be necessary.  Mumenthaler also explained how Swiss Re's alternative capital and insurance-linked securities (ILS) business is developing, highlighting the importance of this to the company.  He said that he expects more opportunities to deploy alternative capital overtime, with the capital markets an important partner for the reinsurance company he leads.  The Swiss Re CEO is bullish on opportunities for the capital markets to assist in narrowing natural catastrophe protection gaps and also to provide risk capital to support challenging areas of insurance coverage, such as event cancellation.

At our recent virtual ILS Asia 2021 conference we held a panel discussion focused on accessing new and diversifying sources of risk from the Asia region. Much of the ILS market is still focused on catastrophe risks, being the pre-dominant component of the insurance-linked securities (ILS) market. But increasingly there is appetite among investors for more, while insurers and reinsurers are keen to access efficient risk capital for a much broader set of risks. And that holds true in Asia Pacific as much as anywhere else. So, this panel discussion is focused on the opportunity in non-catastrophe risks in Asia, why ILS capital may be well suited to some of these and how the market can develop over-time into something attractive and diversifying, while making useful risk capital available to cedents. Speakers explained that some of the advantages of participating in non-cat ILS, for investors, includes being able to hedge some of the risk exposure linked with market risk and cat dominant portfolios. While also highlighting some unique challenges facing the region, including changing regulations and demographics which can differ from country-to-country. Speakers also acknowledged that there is a long-way to go for the Asian market to embrace ILS capital across the risk spectrum, but that opportunities exist to begin making headway.

Paul Schultz, CEO of Aon Securities, joined us for our recent ILS Asia 2021 conference and gave a keynote speech on ILS market developments across the Asia Pacific region. Schultz explained that while Singapore is now an active hub for catastrophe bonds and insurance-linked securities (ILS) and with Hong Kong primed to issue its first deal this year as well, regional sponsor participation can help to ensure their sustainability as ILS domiciles. For an ILS domicile to be successful, Schultz highlighted the need for a strong regulatory framework and also the need for strong regional service providers. Schultz explained that at Aon Securities, "We think that the growth over the last couple of years has been substantial and we’re excited about what that really means for the sustainability of Singapore and ultimately Hong Kong into the region.” “Hong Kong, we really believe will help facilitate bringing more Chinese issuers, or sponsors to market. We’re really excited about that. Obviously there’s been some coverage in the press already around some anticipated transactions that will be facilitated using Hong Kong. “We’re excited about that just being part of the industry. And, we believe that, again, over time, the flexibility that comes through either Singapore or soon to be Hong Kong, we think will actually enable future issuance in the region, and allow for future growth,” said Schultz.

On the final day of our recent ILS Asia 2021 event the audience was treated to an insightful discussion on the Asian catastrophe bond and ILS market from Cory Anger of GC Securities. With Hong Kong now established as a regulated domicile for insurance-linked securities (ILS) and catastrophe bonds, there could be several issuances out of the region by the end of 2021, according to Cory Anger. “Both the Chinese regulator and the Hong Kong Insurance Authority have been very supportive of sponsors, using a Hong Kong Special Purpose reinsurer for an ILS deal, whether it’s through the grant scheme, whether it’s working them through the regulatory approval process,” said Anger. As is the case in Singapore, in order to stimulate deal-flow out of Hong Kong the regulator has introduced a grant scheme which covers some of the costs of issuing a cat bond out of the region. This approach has been successful in Singapore with the number of issuances growing year-on-year, and Anger feels that by offering this incentive, Hong Kong has shown that it wants to make it a success. “I think they’re starting first with companies that haven’t yet brought as much risk to the ILS market, which is Chinese insurers and reinsurers. I think that that’s particularly exciting, because that’s really going to expand Asia risks that are available to the ILS market. “I think it’s very exciting what they’re doing and in particularly supporting China to be ceding risk outwards, out of the country. It will help risk takers understand the risk better, but also should be promoting more capital support in the Asia Pacific region, being sourced from the ILS market,” said Anger.

At our recent insurance-linked securities (ILS) conference for the Asia region, Morton Lane, of consultancy Lane Financial LLC, gave a keynote speech that examined 20 years of cat bond market performance and asked whether investors got what they had expected from it. Morton Lane's keynote looked at whether the performance of catastrophe bonds was worth the risk assumed and concluded that indeed investors did achieve the returns you would have expected from the advertised risk metrics of the deals offered in the period. During a Q&A at the end of his keynote, Lane also discussed the need for greater transparency in the insurance-linked securities (ILS) market, particularly for catastrophe bonds. “I’m lucky to have access to this data," he said. "I don’t think other people do. I think if they did, they could do better and more analysis, and come to better or more informed conclusions." "I think if there was more transparency the market would be more innovative because they could look at their experience. And, so, I know that the SEC considers these to be private market deals; they’re 144A deals. “I think it’s time that the SEC considers this market, which is now maturing fast, to be a public market so that other people can do this sort of analysis and come to these sorts of conclusions."

This session from our recent insurance-linked securities conference for the Asia region featured William Ho, CEO of MS Amlin Asia Pacific, who joined us to discuss the reinsurance market in the region and his firms use of ILS capital. Ho explained the Asia Pacific reinsurance landscape and the rate environment, identifying opportunities and initiatives underway to expand coverage to greater numbers. The capital markets have a key role to play here, as supportive reinsurance capacity to help Asia Pacific insurers grow and expand their portfolios. Insurance linked securities, from catastrophe bonds to sidecars, are useful tools and education about them is growing in the region. Ho discussed MS Amlin's own use of a reinsurance sidecar, which was the first ever sidecar transaction to feature solely Asian property catastrophe risks.

At our recent ILS Asia event we convened three experienced pension fund investors, from PGGM, Future Fund of Australia and the Healthcare of Ontario Pension Plan (HOOPP), who discussed key and timely issues of consideration related to their allocations to the insurance-linked securities (ILS) asset class. All of these pension investors have experience working with leading ILS investment managers and allocating across catastrophe bonds and a range of other reinsurance linked assets. Topics we discussed included, how the ILS asset class has adapted to the new world thrust upon it by the pandemic, climate change and how that factors into the industry's risk taking, the importance of modelling, challenges with social inflation, and how collateral is managed in reinsurance investment deals. The investors gave candid opinions on what it means to invest in ILS and reinsurance, as well as any concerns they have over the state of the industry right now.

During our recent ILS Asia event we interviewed two experts from Securis Investment Partners about the importance of investor communications, especially in relation to Asian perils & climate risk. Yuko Hoshino, Co-head of Global Investor Relations and Paul Wilson, Head of Non-Life Analytics, both from Securis Investment Partners LLP, gave an overview of the Asian ILS investor base and explored the experience of investors in the region after some challenging loss years. The impact of Japanese typhoon Jebi was a focus of the session and Hoshino explained that when the storm arrived in September of 2018, even local people did not expect that it would become the largest loss event in Japanese insurance history. For Securis, Hoshino explained that Jebi was more impactful for aggregate deals since the loss creep followed other 2018 events, including Hurricane Michael and wildfires. According to Hoshino, in the aftermath of Jebi, investors specifically asked questions around issues such as modelling for Japan typhoons, flood risk, the setting of side pockets and how losses would be reserved for. Wilson went on to explain that when he speaks with investors, he always looks to separate the two aspects of the use of the catastrophe models. The pair also explained how they approach investor discussions about key issues such as climate change, both from the investment and science sides of the equation.