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

At this time of year with the reinsurance renewals fast-approaching and new capital entering the market from private equity investor backed raises and start-up launches, as well as insurance-linked securities (ILS), being good custodians of capital is especially important (but often neglected). In this podcast episode we touch on some of the reasons new capital can often find itself having to be the cheapest reinsurance capital in the market. As a range of factors have driven the reinsurance market into its current firming (perhaps hardening) state, this has attracted large private equity investors, who are deploying significant sums into reinsurance start-ups led by well-known industry luminaries. But, no matter how luminous, start-ups can face the age-old problem of being new to programs and so having to be cheap, or super-competitive, on price to get sufficient signings to deploy all their capacity into renewal business. This year, a number of start-ups have added billions of dollars of new capital into the market, in a year when sector capital has not been particularly severely eroded. These well-funded start-ups are banking on being able to build quality portfolios of reinsurance business, to deliver the returns their private equity backers demand. At the same time, new ILS fund start-ups face the same issues, of having to be competitive and open to avenues to deploy capital they may not have envisaged. All of which will have an effect on the renewals, but also underscores the need to be good custodians of investor capital.

This episode features a panel discussion featuring three leading institutional investors that allocate to insurance-linked securities (ILS) and reinsurance linked investments.  The discussion was held at our recent ILS Asia 2020 conference and the experienced ILS investors explained what they really look for from their allocations to the ILS asset class, as well as some of the challenges they face and frustrations they have.  The investors noted that the experience of catastrophe losses, loss creep and trapped ILS collateral of the last few years has resulted in lessons being learned in the ILS industry.  “This period was clearly a challenge for the whole market,” said Eveline Takken-Somers, Senior Director, Lead Portfolio Manager – Insurance Portfolio, PGGM.  “We spent quite some time educating our clients so the losses itself did not raise many questions.”  Panellist Bernard van der Stichele, Portfolio Manager (ILS), Fixed Income & Derivatives Healthcare of Ontario Pension Plan (HOOPP), explained that the recent loss experience was new for most ILS market participants.  “That sequence of events was really new for many people in the industry, not just investors but fund managers included. And, so, it was interesting to observe how incumbent markets dealt with losses, loss estimates and then communicated that to investors. I think everybody learned something out of those couple of years.”  Craig Dandurand, Head of Debt at the Future Fund of Australia, said it’s a matter of being prepared for the eventualities of losses, creep and trapped collateral when entering the ILS space.  “Anytime you go into an asset class that has an unclear potential outcome, you have to be prepared for that volatility of realisation of gains or losses, much less the volatility of the actual cash flows themselves, the timing comes into play.  “And, so, I think the surprises were more in terms of the range of outcomes, the different range of events, the extent to which at least during the first series of losses the relative alacrity with which capital was redeployed, or made available to be redeploy, that was a bit dispiriting.  “So, in a sense it feels like we could be at the start of a bit of a relief here in the sense that my other day job, on the credit side, you see credit spreads having tightened very, very quickly after the Covid-19 related events back in February, March and April. Here you haven’t quite seen that snap back this time around.  “We are still learning and I’m sure we’ll be learning long into the future.”

Sidney Rostan, Head of ILS at SCOR Investment Partners is the latest industry executive to join our series of Artemis Live video interviews.  Leading insurance-linked securities (ILS) investments for the asset management group of global reinsurance company SCOR, Rostan shared his views on a specific topic of interest, the opportunity in industry-loss warranty (ILW) investments, as well as on ILS market trends in general.  Rostan explained that the industry-loss warranty (ILW) market is more than just a fall-back for retrocession, or an alternative to a catastrophe bond.  "We've been able to build relationships in that market," he explained.  "We've seen the landscape change, in terms of who's buying and who's selling protection, we've seen people come in and come out. But at the same time we do have long-standing relationships with a number of counterparties," he continued.  Adding that, "We're renewing some ILW structures for the fifth or the sixth time," with customised solutions and tailor-made ILW coverage a focus.  "An ILW is basically the only product which is not syndicated. It is the only product which allows you to generate your own investment opportunity, in a way, unlike cat bonds or the vast majority of CRI.  "You can build your own structure. You can imagine that you have an existing portfolio and you want to design the perfect additional investment, really fitting your portfolio, enhancing the diversification and the risk -adjusted return, for example.  "So you can design that structure and try to place it, try to find the exact matching interest," Rostan said.  While that's theoretical and often, in practice, it is not always so easy to find the exact matching appetite, you usually end up with the structure you're looking for or a structured that is very similar and that makes sense from a portfolio construction perspective, he explained.  More broadly, Rostan discussed ILS market conditions and his outlook. He said to expect "an overall market hardening, more investor discipline in the visible part of the market, and a pretty good environment for us."  While there is still a lot of uncertainty in the market over COVID-19 and the potential for losses from the pandemic, while legal actions continue to evolve, Rostan said the ILS market will take its share of the loss, with more impact on the UNL side and in the retro market.

This podcast episode features a panel discussion on life insurance linked securities, covering what cedants and investors need to know about life ILS as an asset class right now under the shadow of the COVID-19 pandemic.  The discussion was held at our recent ILS Asia 2020 conference and it was the first time we introduced life ILS to our Asian audience.  Overall, the impacts of the ongoing Covid-19 pandemic are expected to be positive for opportunities in the life insurance-linked securities (ILS) space, according to Luca Tres, Partner, Head of Life, Securis Investment Partners.  While Tom Spreutels, Head of Origination, Life & Alternative Credit, Leadenhall Capital Partners, explained that he hopes that altered risk perception would translate into more deal flow in the life ILS sector.  "On the one hand, there is less risk appetite from the non-specialist players which brings an opportunity for us. Secondly, it probably also means that people in the industry who have been affected by this secondary impact, i.e. the market impact, may start thinking about doing something, which means attractive opportunities for us to go and play, and be part of a solution to the problem that people may be waking up to,” Spreutels said.  Tres from Securis said, “If the ILS community manages to come out of the worst pandemic of our lives without any substantial loss, I think we pretty much achieved our goal, by providing something uncorrelated and resilient for our investors.”  Adding that, “So, as a whole I actually see Covid-19 to have a positive impact for our industry, because it translates into better opportunities for us to deploy money, and it translates to opportunities to find even more attractive returns,” said Tres.

Christian Mumenthaler, Chief Executive Officer of the world's largest reinsurance company Swiss Re, joined us this month, to discuss how his company has fared since the pandemic, the state of the market and what his outlook and priorities are for 2021.  Mumenthaler discussed a wide range of topics, from the current status of Swiss Re as it deals with claims from the Covid-19 pandemic, to reinsurance renewal expectations, use of insurance-linked securities (ILS) and alternative capital, innovation, technology, the protection gap, as well as an outlook for 2021 and beyond.  "Our outlook is optimistic. With everything that's happened, I think the industry is obviously moving," Mumenthaler explained.  Adding that, on rates across insurance and reinsurance, "More is needed for the industry to be sustainable and I think everybody understands that."  "We're optimistic, we're extremely well-capitalised.  "Still, quality will matter right? I'm not saying this is a great opportunity to grow like hell. I think the whole industry needs to focus on quality," he continued.  On use of alternative reinsurance capital Mumenthaler said, "I always believed that the capital market will play an important role in closing this protection gap.  "I think it's here to stay, in the Nat Cat field, in some of these peak risks. I think it will play a bigger and bigger role."

Paul Schultz, Chief Executive Officer (CEO) of Aon Securities, the capital markets and insurance-linked securities (ILS) focused unit of the insurance and reinsurance broker, joined our ILS Asia 2020 conference to give a keynote speech in July 2020.  Schultz explained that the trend of insured against uninsured losses across the Asia Pacific region is not sustainable, and the insurance-linked securities (ILS) market will need to play an integral role in addressing the issue.  "The protection gap exists globally and there’s a stark reality between what is insured and what is uninsured. And, in Asia Pacific that protection gap is even slightly worse that what it is globally," Schultz said.  Adding that, "ILS and broadly the capital markets are going to have to be an instrumental part of the way we solve this."  During his speech, Schultz also noted the expectation for a broader range of catastrophe bond and ILS sponsors to come to market.  "I would say on the type of sponsor, we think that corporate sponsors, government sponsors, so really getting away from the traditional sponsors of catastrophe bonds, we think that that’s a very reasonable growth expectation, not only in Asia but globally, that more different types of sponsors will come to the market," he explained.  Saying that, "We see corporates and governments as well represented in that."

Our latest interview features Peter Giacone, Managing Director and Global Head of Insurance at Kroll Bond Rating Agency (KBRA), who joined us to discuss how investor appetites have changed due to the coronavirus pandemic and what this means for the insurance-linked securities (ILS) sector.  Giacone explained that financial markets in general are seeing large flows from investors and that part of this interest is being shown in the insurance and reinsurance space.  But with traditional investment classes highly volatile, institutional investors have been looking closely at alternatives, especially those that exhibit lower correlation.  As a result, the insurance-linked securities (ILS) market and direct investments into reinsurance risk bearing vehicles or funds are looking incredibly attractive at this time.  Giacone said that, "People have to adapt and that spells opportunity. I think this asset class in particular is going to start to look more and more attractive.  "A longer-term investor is going to look at ILS and say, you may have some temporary dislocations in the market when you have a high correlation, but over the long-term they're going to see that this is an asset class that clearly behaves completely independent of what's going on in other markets for the most part and therefore provides a tremendous opportunity."  We also discussed the use of ratings in ILS markets and catastrophe bonds, with Giacone explaining that he sees the potential for entire portfolios of ILS assets to be rated, rather than just individual bonds and he described how this could prove attractive to major investors such as life insurers.

This podcast episode features a panel discussion from our July 2020 virtual ILS Asia conference, participants discussed the opportunities for parametric risk transfer structures in the region, as well as how reinsurance and insurance-linked securities (ILS) markets can capitalise on them.  Speakers said there is a need for greater education and awareness, but that risk managers across Asia are becoming increasingly comfortable with the idea of parametric structures.  In recent years, and notably in the insurance, reinsurance and ILS space, parametric trigger structures have grown in popularity and speakers explained how corporate risk managers use this type of protection as an alternative and to complement their traditional programmes.  The panel also discussed the use of parametric triggers in catastrophe bond transactions.  Availability of data can be an issue though and speakers said while in Asia there is access to satellite data relatively easily, it is still more difficult to obtain windspeed data, for example, when compared with more developed markets like the U.S.  Participants also offered some thoughts on the investment case for parametric ILS structures, insurance or reinsurance and how investment managers approach these types of transactions.

This podcast episode features panellists at our recent virtual ILS Asia conference discussing important role of insurance-linked securities (ILS), such as catastrophe bonds and other capital markets backed reinsurance tools, in narrowing and closing protection gaps in the Asia Pacific region.  Featuring participants from the World Bank Treasury, reinsurance broker Guy Carpenter's GC Securities, law firm Rajah & Tann and the Monetary Authority of Singapore (MAS), the panellists also discussed the developing Singapore and Asia marketplace for ILS and how that can help in closing risk financing gaps.  They explained that the Asia Pacific region has become a key component of the global insurance-linked securities (ILS) marketplace and that interest from cedants and issuers continues to surge.  Whether through quota share reinsurance arrangements or in reinsurance sidecars that ILS investors participate in, or more directly through issued catastrophe bonds and collateralised reinsurance deals, the ILS markets participation in and support of Asian catastrophe risks is increasing, the panellists agreed.

In this podcast episode we hear from Franz Josef-Hahn, CEO of Hong Kong headquartered reinsurance company Peak Re and Iain Reynolds, Director & Head of Analytics at Peak Re, who gave a keynote presentation on the developing Asia reinsurance and ILS market. The pair highlighted rapidly increasing probable maximum losses (PMLs) across Asia, as development and urbanisation accelerates at scale in the region. This highlights the need for more insurance and reinsurance capital, as well as the need for better data and modelling to support risk transfer and deployment of capital into the burgeoning risks in Asia. The scale of the PML's that Peak Re believes will accumulate in areas like the Greater Bay region of China suggest that insurance-linked securities and the capital markets have an essential role to play in supporting expansion of insurance across these areas. As a result, Peak Re's CEO Franz Josef Hahn said that ILS capital can support the emerging opportunity for underwriting Asian risks, and highlighted his companies partnership role with investors, as well as its recent investment into the segment with its acquisition of Lutece and formation of its own ILS fund manager Peak Capital. Following the keynote I spent 15 minutes quizzing Franz and Iain, which you can hear at the end of this podcast episode as well.