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

For our next few podcast episodes we're going to share some of the audio from our recent virtual ILS Asia 2020 conference. More than 850 attendees have now watched sessions from the virtual conference, a figure that keeps on rising. To begin, this episode features Mr. Benny Chey, Assistant Managing Director (Development and International), Monetary Authority of Singapore (MAS). Mr. Chey discussed the role of Singapore in the insurance-linked securities (ILS) market, the activity it has seen in terms of catastrophe bond issuance and the importance of capital markets participation in provision of global insurance and reinsurance capacity. In particular, Mr. Chey highlighted the role of ILS and catastrophe bonds in provision of catastrophe reinsurance, helping to narrow and close protection gaps in the Asia Pacific region and beyond. He also revealed an expansion of the Singapore ILS grant scheme, which will now run until the end of 2022, providing a fantastic opportunity for insurance and reinsurance companies to bring cat bond or other ILS transactions to market in Singapore at lower-cost of issuance.

With the news that Integral ILS Ltd. is launching as a new Bermuda based ILS fund manager, I thought it would be interesting to look at the ILS start-up opportunity through the Integral ILS lens. Starting up is never easy, no matter the expertise of those involved, the quality of the provenance, or the blue-chip quality of the partners involved. In the case of Integral ILS, they have all three. The expertise of Managing Partners Lowther and Zeng. The provenance of their respective track records, history in ILS and of working together. The blue-chip quality of stakeholders AmWINS and TransRe. But Integral ILS so far doesn't have capital and at this time when institutional investors remain spooked by the pandemic volatility and often focused elsewhere, it may not be the easiest thing to get started, let alone to gain meaningful scale. Of course nothing is every simple or guaranteed in the world of insurance-linked securities (ILS) and while Integral ILS will face the same challenges as others trying to raise capital at this time, the start-up has a lot going for it in the platform they are creating and the strategy they intend on following. So it's going to be interesting to watch their progress and to see how receptive investors are to this latest ILS start-up offering.

Niklaus Hilti, Chief Executive Officer and Chief Investment Officer of Credit Suisse Insurance Linked Strategies, kindly joined us to discuss the current status of the ILS investment space and reinsurance market trends.  We began by discussing the impacts of the Covid-19 pandemic in insurance-linked securities (ILS). Hilti explained that the Credit Suisse ILS team had been closely watching the situation develop since they were alerted to it back in January.  "We run life and non-life on our platform. This was generally something where we expect a significant importance for our life business. On the non-life side we also expected that a pandemic is going to have a significant impact on the insurance industry and also on the financial markets," he explained.  Adding that, "On the operational side it's really not a big impact, apart from travelling. On the business side, Covid-19 definitely has impacts."  In terms of specifics, Hilti said, "In the life business you definitely have to prepare and you can. That means looking into liquidity and also whether you can still de-risk at this point in time. And also putting up some hedges, which we did for both life and non-life relatively early on in the process.  "We had a lot of technology and models helping us on the pandemic side, but I would say so far, on the life side the impact, yes we see some mark-to-market movements, but at the moment we believe there will be very little to no loss of notional if the pandemic stays contained in developed countries, as we see it at the moment."  "But it's far to early to say that this is over," Hilti cautioned.  He added that, "On the non-life side, the catastrophe ILS side was as expected affected by the flight to liquidity of investors. For us that was more of an opportunity and not too dissimilar to what we saw in 2008."  On the market for property insurance or reinsurance and business interruption, he added, "Insurance is definitely impacted. Reinsurance is somehow impacted. And then ILS is less impacted than these two segments of the overall market. But for the reinsurance industry it's a tough event."

With hurricane season now officially underway we spoke with Jin Shah, Director, Capital Markets & Resilience and Jeff Waters, Senior Product Manager both of catastrophe risk modelling specialist RMS.  RMS provides risk analytics, modelling and data services to the insurance, reinsurance and insurance-linked securities (ILS) industry, so with hurricane season upon us we discussed the outlook for the months ahead with Jin and Jeff.  The pair discussed the forecast outlook for the 2020 Atlantic hurricane season and the tools that RMS offers to help companies in the re/insurance and ILS market better understand their exposures.  Encouragingly, the ILS market is "making a real investment in the analytical processes and workflows that will result in an underwriting process that hopefully mitigates against surprise results," Jin Shah explained.  We discussed the potential impacts of the Covid-19 pandemic on catastrophe response and claims assessment, as well as how the pandemic lockdown and parking of assets has changed the exposure of the industry to a degree.  Waters highlighted that, "Our models do have a lot of flexibility for our users to conduct sensitivity tests and essentially generate their own view of risk for situations like this."  Shah discussed the RMS products that help ILS funds and insurance-linked investors to better understand the threats posed to their portfolios when a hurricane is heading for land.  "This year we're extending the insights and now we've got this notion of a conditional probability of attachment, based on a given level of industry loss," he told us.  This will help ILS investors analyse what specific storm impacts could mean for their catastrophe bond profiles, Shah further explained.  Shah also told us that RMS' tools can show revised probability of attachments for different ILS assets based on given industry loss scenarios.  RMS will also deliver its daily event selection as a risk profile through RMS' Miu platform, which will allow ILS fund managers to analyse their private transactions as well, not just cat bonds, so they can provide better insights to their investor customers.

In this podcast episode we discuss current reinsurance market dynamics and the balancing-act that is capital inflows vs pricing and rate pressure. In a recent article we said that it's a fine line between accolades achieved through raising significant sums of new capital and rate pressure returning to the reinsurance market. In this podcast we summarise some of these thoughts and go into more detail, of relevance to the segment of the market focused on property reinsurance and in particular catastrophe risks (where Artemis is most focused, due to its insurance-linked securities (ILS) market leaning). The property reinsurance and catastrophe risk segment is not an area of the market that is particularly poorly capitalised throughout, but much of the capital raising activity is going to result in reinsurance and insurance players diverting more capacity to this area. With ILS funds and other insurance-linked securities (ILS) ventures likely to bring even more capital to market over the coming 12 months, we wonder whether there could be a return to an over-capitalised segment in property catastrophe reinsurance and retrocession risks? Or whether discipline will prevail and the market control its appetite, while enforcing a much needed and somewhat raised (from previous levels) pricing floor.

Matt Jones, Principal at financial technology (fintech), insurance or reinsurance technology (insurtech) venture capital investment firm Anthemis joined us for our latest video interview.  Jones talked about the venture investing thesis at Anthemis, the sectors of fintech and insurtech that excite the company, as well as his views on the insurtech wave that has spread across insurance and reinsurance markets in recent years.  "If I think about the investment thesis we've got... within the insurance industry everything is in scope, at least at this point. We still feel that there are sufficient opportunities across pretty much all lines of business, whether it's P&C, life and health, primary or reinsurance and across the entire value-chain," Jones explained.  "We're also investing in a series of other spaces that we call adjacencies. These are where there are opportunities to embed financial products, or insurance products, into other industries and where you can see other businesses being built that could have a knock-on impact on the insurance industry further down the line," he continued.  He discussed trends in insurtech, both before and now through the lens of the Covid-19 pandemic, as well as where Anthemis sees opportunities going forwards.  On the potential for the capital markets and insurance-linked securities (ILS) funds to work alongside insurtech start-ups, Jones sees companies looking to efficiency, in terms of capital and reinsurance capacity.  Jones said, "One of the things we see our start-ups spending a lot of time thinking through, is what is the most efficient form of capital that I should be working with, or the best form of capital.  "Is it the reciprocal model, is it traditional reinsurance, is it having their own carrier. You know, is it doing something using derivatives in Bermuda, for example. For each start-up there's going to be an ideal answer, I think."

Michael Millette, Founder & Managing Partner at Hudson Structured Capital Management, a specialist alternative asset manager with a focus on sourcing insurance and reinsurance linked returns for its investors, joined us for our latest video interview.  Millette discussed insurance-linked securities (ILS) and reinsurance investing, giving his view on prospects for the ILS asset class beyond the Covid-19 pandemic and what that may bring for investors.  "Tragedy and history. This is as near to what any of us have seen in our lifetimes, an event affecting everybody all around the world, so it's tragic and likewise it's historic," Millette said.  On the Lloyd's of London estimate for a $107 billion non-life industry loss, he commented, "I expect that's in the right neighbourhood. We have been talking and thinking about losses on that scale.  "It's interesting though, this is not just a gigantic catastrophe loss, although it is a gigantic global catastrophe. This is a massive horizontal loss for the industry."  He went on to explain what this could all mean for the ILS fund and reinsurance linked investment market.  Describing some of the immediate opportunities that could arise in specific lines of business, as well as in investing in insurtech start-ups, saying "this a digital forcing event around the world" and calling it "the insurtech moment."

We spoke with Sean Bourgeois, Founder & CEO of technology-based programmatic insurance and reinsurance risk transfer marketplace provider Tremor Technologies Inc.  Bourgeois explained how the marketplace Tremor has created works, as well as its value proposition for insurance and reinsurance market participants.  "We bring modern liquidity, while preserving relationships for cedents, brokers and reinsurers, essentially matching risk and capital much more efficiently than the traditional process today," Bourgeois explained.  Adding, "The heart and soul of what we do really is about price discovery and syndication of risk, using technology to do that."  He also discussed the industry-loss warranty (ILW) auctions that Tremor has been running on a weekly basis and how the data gathered on supply and demand appetite can be important for the broader market.  The discussion also covered current reinsurance renewal market conditions and how technology can assist in clearing the market, particularly when conditions are more challenging as we've seen of late.  "We see tremendous opportunity for brokers to capture that programmatic trading capability and in the case of where we sit today, to help unlock supply, help their clients complete programs, whether a full program or a shortfall, using technologies like we have," he said.  Overall, he said the goal at Tremor is to help all sides much more efficiently transfer risk in the reinsurance and wholesale risk insurance markets.

In this episode we discuss the fascinating state of the insurance-linked securities (ILS) and reinsurance market at this time, focusing on catastrophe bonds, industry loss warranty's (ILW's), reinsurance sidecars, retrocesssion and the mid-year renewals. With speculative capacity now being seen in the market, speculative covers being sought, and rates hardening in property catastrophe reinsurance, we find ourselves in a market the likes of which has not been seen for more than a decade. We discuss the buoyant catastrophe bond market, which has proven particularly resilient to the Covid-19 pandemic, the ILW market which has been struggling to clear, the reinsurance sidecar market where some sponsors are struggling for capacity and retrocession which some are calling dysfunctional. Feeding into these markets are the same set of dynamics. The losses of recent years, the ILS market impacts seen from trapped capital, the contraction of the retrocession offering, then the pandemic losses and investment side impacts, as well as now the ongoing uncertainty over what this all means for the coming months and years ahead. All of which shapes the market for a fascinating second-half and potentially a lot of hedging activity.

Cory Anger, Managing Director of GC Securities, the capital markets and insurance-linked securities (ILS) unit of reinsurance broker Guy Carpenter, joined us to discuss the state of the catastrophe bond and ILS market, under the lens of the Covid-19 pandemic.  Anger noted the strong start to the year for catastrophe bond issuance in 2020 and said that despite the initial hit caused by the pandemic, issuance is expected to remain robust.  The catastrophe bond continues to offer the protection many cedents are seeking, while enabling them to diversify their reinsurance and retrocessional capital sources, Anger said and also noted the investor case as well.  "One of the things I'm most proud of is that this marketplace again has reaffirmed that it does perform differently to the broader capital markets," Anger explained.  Highlighting the performance of ILS versus other asset classes and how ILS exhibited positive features under the pandemic-hit market conditions, Anger said, "We had a more muted reaction, as represented through the cat bond index, to the valuation of this product. But if you look at more traditional asset classes, if you looked at the same time period for the S&P 500, they were down almost 23%.  "When you also look at the correlation of ILS, represented by cat bonds, you can see a substantially lower correlation pattern between ILS and the other asset classes."  Anger went on to discuss what this means for investment allocations to ILS and reinsurance going forwards.