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

At our recent ILS Asia 2021 event, a panel of experienced insurance-linked securities (ILS) professionals discussed investment management issues with a view to the Asian marketplace. In spite of the pandemic and the inability to travel, the panellists noted that through the use of technology it’s still possible to build relationships with prospective investors and overall, developments in the ILS industry continue to be positive. Panellists discuss the appetite for ILS and reinsurance linked investments among the Asian investor community and the fact it persists. They also discussed the importance of communication around things like loss creep and climate change, especially when considering new investors in the Asia region. Building partnership with investors in ILS was seen as key by the panellists, given the need to educate and keep communication around reinsurance loss events and also the vagaries of how the ILS structures themselves work.

This podcast episode features an interview with Timothy Yip, Executive Director at ILS Advisers, an insurance-linked securities focused advisory and investment management arm of HSZ Group. Yip joined us to discuss the investor landscape in Asia and how that is reflected in the insurance-linked securities (ILS) space. There's a clear appetite for diversifying sources of return, as we see among the global institutional investor base, so reinsurance is definitely relevant as an asset class. But the Asia region investor base has differing levels of maturity and education and Tim Yip took us through how he looks at different countries in the region and their chances of allocating to the ILS and reinsurance linked asset class. Yip provided an overview of the history and maturity of ILS as an asset class in the Asia region, as places like Singapore and Hong Kong look to position themselves as hubs for risk transfer business, including ILS. Of course, pension funds in both Japan and South Korea have been allocating to ILS for some time now, while Singapore has sovereign wealth investors that participate in the sector.  According to Yip, these areas in Asia and also if you expand to Asia Pacific and include Australia, have been the first to embrace the asset class because of the fact their institutional market size is just so much bigger.

At our recent ILS Asia 2021 conference, Shevawn Barder, CEO of AM RE Syndicate gave an excellent keynote speech on opportunities for ILS funds and investors to partner with businesses like her own to access the returns of US specialty business. The keynote speech is then followed by a Q&A with Artemis editor Steve Evans, in which the subject was explored more deeply. Barder explained why the US specialty lines opportunity should be attractive to investors and also reinsurers from the Asia region, as well as the rest of the world. She called it an “opportunity for Asian reinsurers investors and capital providers to tap into the US primary market.” She explains how the US program segment of the insurance market works, saying that the MGA model has become increasingly sophisticated and that “they have a very specialised and focused business model, and a very low cost infrastructure,” making them ideal for capital partners to work with and “an effective way to access the primary US market.” Barder also explains how working with an MGA partner, such as a reinsurance intermediary like AM RE Syndicate, means investors and reinsurers can put their capital behind an origination focused underwriting partner, to gain access to business they may not otherwise find it easy to source.

Our recent ILS Asia 2021 conference featured a panel discussion where experts explored the emerging insurance-linked securities (ILS) platform in Hong Kong and asked what considerations there may be for sponsors of or investors in catastrophe bonds and other ILS. Thanks to the efforts of Singapore and more recently Hong Kong, there’s an exciting and growing opportunity for the insurance-linked securities (ILS) sector to play a meaningful role in the Asia region, according to these industry experts. Aided by its ILS grant scheme, Singapore has witnessed a surge in cat bond issuance over the past 12 months or so. Investor interest in ILS is high and as the Asia region looks to capture some of the demand, Hong Kong is also positioning itself to become a hub for ILS business. With interest in the asset class heightened, our panellists shared their thoughts on what this might mean for the ILS market in Asia, and also for issuances in Hong Kong. The panel featured: Stefan Kräuchi, Founder, ILS Advisers an ILS fund manager and investment adviser based in Asia; Andy Souter, Co-Head of P&C at Hong Kong based reinsurer, Peak Re; Simon Lam, Executive Director, General Business, Hong Kong Insurance Authority; and Ricky Spitzer, Partner at global law firm Mayer Brown.

This episode of our podcast features an interview with Simon Lam, Executive Director, General Business at the Hong Kong Insurance Authority, who joined our latest event, ILS Asia 2021 to discuss Hong Kong's plans for its new insurance-linked securities platform. Hong Kong already has an established insurance and reinsurance market, while its legislative preparations for ILS were completed at the beginning of 2021. Since then the Insurance Authority has been building out its licensing and supervision infrastructure, with the support of an ILS working group, including notable ILS market players, Mr. Lam explained to the ILS Asia 2021 audience. “As we all know, being efficient in licensing is very, very important for ILS issuers,” he explained. Saying that “We also started an ILS capacity building exercise for staff of the Insurance Authority, through the engagement of a professional ILS consultant.” “The final piece was when the pilot ILS grant scheme was launched by the Hong Kong government in May,” Lam continued, saying that, “If you ask me where are we now, I would say that we are 99% ready for the first issuance.” At the same time Hong Kong has been engaging with potential sponsors of insurance-linked securities (ILS) arrangements, to generate initial deal-flow interest. Mr. Lam told our conference audience that, “In parallel, we are soliciting support from potential sponsors and I’m pleased to advise that we are already working on the first cat bond and hopefully, if all things go well, we will have the first ILS issue out of Hong Kong within this year.” The panel session mentioned at the end will be included in a later podcast episode.

The catastrophe bond market is on-track to break multiple records after a particularly busy second-quarter of 2021. Activity in the catastrophe bond and related insurance-linked securities (ILS) market accelerated again in the second-quarter of 2021, with the three-months seeing an incredible $8.5 billion of new risk capital come to market, according to the latest report and data from Artemis. Q2 2021 has set a new quarterly record for issuance, at $8.5 billion. This staggering level of new reinsurance and retrocession risk capital was supplied through 30 transactions consisting of 66 tranches of notes. Of the record breaking Q2 issuance total, a significant almost $6 billion, or more than 70%, covered property catastrophe risks. Our data shows that this is behind only Q2 2017, a period in which a huge $6.4 billion of quarterly issuance covered catastrophe risks. However, as at the end of H1 2021, cat risk issuance has reached a new high of more than $8.5 billion for the first six months of this year, which is slightly higher than the record for property cat bonds issued in the first-half previously set in H1 2017. Year-on-year, cat bond and ILS issuance increased by approximately $4.87 billion, ensuring that for the first time ever, H1 issuance has surpassed the $10 billion mark. In fact, combined with robust investor demand for reinsurance-linked returns and sponsor appetite for protection in Q1, the $8.5 billion of issuance witnessed in Q2 now takes H1 2021 total issuance of catastrophe bonds and related insurance-linked securities (ILS) to a massive $13.12 billion. To put this into context, more than $13 billion of issuance at the halfway stage of the year means that 2021 is already the third most active full-year on record, behind only the $16.4 billion and $13.9 billion recorded in 2020 and 2018, respectively. As demand for collateralized reinsurance persists and the cat bond market offers particularly attractive pricing conditions, we expect issuance to remain solid through the full-year.

For our latest Artemis Live interview we wanted to dive into a hot topic, inflationary pressures, material prices and labour costs and how this could play into catastrophe claims for the insurance, reinsurance and insurance-linked securities (ILS) industry in 2021.  Inflation is big news currently, with some economists expecting a sustained period of price increases and inflationary pressures around the world.  There are several factors causing this, some specific to different locations and regions of the world.  But for the insurance, reinsurance and insurance-linked securities (ILS) market, materials, labour and other costs have in some cases risen significantly, which has ramifications for catastrophe events and possible loss amplification to claims.  To help me dive deeper into this issue, I spoke with two senior Verisk Analytics executives with years of experience on the claims-side of the market, Mike Fulton, President of Xactware and Tom Johansmeyer, Head of PCS.  Fulton explained the current situation, "We're in new territory. This has not happened in the past, even in my thirty years in the business. "We're seeing inflation in several areas, some of that is significant and we certainly expect additional inflationary growth in both material and labour for the near-term."  Johansmeyer explained that this is a particularly hot-topic for the industry at this time, "It's interesting, because we've been getting calls about this for almost a year now."  He advised market participants ensure they have the access to data that's required to help in understanding how inflationary pressures could play into catastrophe claims.  "It's important to look at PCS alongside Xactware, because we'll (PCS) tell you what the cat is doing, we'll help you understand what your portfolio is doing. But as you dig into that, it's the granularity that you see with Xactware, which is literally as close to the risk as you can get, that provides those sorts of insights."  This interview features a discussion of what these inflationary pressures mean and how reinsurance and ILS market participants may deal with the effects of it, including hedging, retrocession and other portfolio management opportunities.

For our latest Artemis Live interview we were joined by two Jeff Waters and Ben Brookes from catastrophe risk modeller RMS, to discuss the latest update to the RMS North Atlantic hurricane model and how the insurance-linked securities (ILS) market should think about this evolution in modelling hurricane risk.  RMS has recently launched an updated version of its North Atlantic hurricane risk model, with Version 21 containing some changes that are important for reinsurance and insurance-linked securities (ILS) market participants to understand, not least for the investor side of ILS and catastrophe bonds.  Jeff Waters, Meteorologist and Senior Product Manager at RMS and Ben Brookes, VP, Consulting Services at RMS joined us for the discussion.  With the 2021 Atlantic hurricane season now upon us, their explanation of the updates to the hurricane model and how ILS fund managers and investors should think about this, is valuable preparation for the storm season ahead.  Waters explained why the updates are important, “With Version 21 of our Atlantic hurricane models, we really continued to evolve the science of hurricane risk modeling.  “Over the years we’ve introduced various enhancement, such as multiple views of event frequencies, a very comprehensive storm surge modelling framework. All those key components remain, we’ve just enhanced them with the latest scientific understanding of the hurricane risk landscape. “A lot of that in Version 21 is informed by new data and learnings from recent impactful seasons, including $6 billion in new claims data.”  Brookes discussed at a high-level how capital market investors and those in the ILS market, such as fund managers and collateralized reinsurance players, should think about the updated model.  “In Version 21, our reference view of risk generally yields fairly small changes for ILS, versus the prior version. We’ve made some tweaks to the sets of hurricane rates that we have based on the data from the last couple of seasons, and those changes are relatively small overall,” Brookes said. Continuing to explain, “We’re also updating our industry exposure database as part of Version 21. The changes for that again are relatively small to bring the exposure in line with the latest growth trends. So the changes in the baseline views, if you like, are relatively muted.  “I think what’s more interesting is the impact and how we’re able to inform understanding of key uncertainties. I expect fund managers might want to think about how they’re pricing risk if the roof replacement rules are strictly followed, because those can have a fairly meaningful impact on loss.”

During a recent Artemis Live webcast, industry experts argued that utilizing technology will be critical in enabling the reinsurance and alternative capital markets, or ILS sector, to help hedge pandemic risk using parametric solutions. The event was sponsored by Vesttoo, a specialist in risk modeling and alternative risk transfer for the Life and P&C insurance markets, and which was represented by CEO Yaniv Bertele. Also present on the panel were James Potter, CEO of Rokstone Underwriting, Luca Tres, Head of Strategic Risk & Capital Life Solutions, EMEA at Guy Carpenter, and David Bearman, CEO of Aventum Group. As a backdrop to this discussion, recent renewals have seen insurance and reinsurance players scramble to exclude pandemic risks from their books, due to the size and systemic nature of the peril, plus the unintended nature of the cover they have in many cases found themselves on the hook for. But Bertele argued that more sophisticated utilization of technology could help the capital markets to get a handle on pandemic risk, and “bridge the gap” between the now-familiar territory of catastrophe risk and some of the more complex long-tail risks. The panel discusses the way parametric triggers could be used to construct pandemic hedges for P&C insurance and reinsurance risk, as well as the potential challenges in transacting in this while a global pandemic is ongoing.

For our latest Artemis Live interview we were joined by Tom Johansmeyer, Head of PCS, to discuss the insurance-linked securities (ILS) market's appetite to invest in strike, riot & civil commotion (SRCC) or political violence related risks.  The discussion came about because of a recent piece of work undertaken by Tom and his team, in which they polled the insurance-linked securities (ILS) market for its view on political violence as a class of business, including strike, riot and civil commotion (or SRCC) risks.  Tom and his team at PCS surveyed some 60% of the ILS fund market, by assets under management, equating to around 15 firms, to find out what ILS managers themselves think about SRCC or political violence risks and what it might take to make it a class of business they want to underwrite, as well as what if anything might stop them from doing so.  While ILS fund mandates can be very prescriptive and so include these kinds of risks in some cases, they aren't the main blocker. Instead it seems price and structure are the main issues blocking ILS funds from embracing these kinds of risks within their portfolios, as there just aren't the deals coming to market, at pricing that would be attractive, or structured in a way that complements on ILS investment strategy it seems.  But Johansmeyer believes there's a need for more capacity, to enable the insurance and reinsurance market for SRCC and other kinds of political violence to function better, with a role for ILS funds in providing some of that, likely on a retrocessional basis to begin.