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

We spoke with Tom Johansmeyer, Head of PCS, today, to discuss the rioting and civil disturbance seen at the US Capitol buildings on January 6th 2021. While the rioting and disturbances seen yesterday won’t have any significant implications in terms of losses for the insurance and reinsurance industry, there is a lot to consider. Johansmeyer explained some of the backdrop to yesterday’s events, as so-called strike, riot and civil commotion (SRCC) risks have appeared elevated for more than a year. With a lot going on in the world right now, various pressures are building and potentially elevating SRCC risk, Johansmeyer explained. It’s a challenging risk to understand and evaluate, but one that has the potential to be increasingly impactful in financial terms as well, although it is still relatively rare that SRCC losses fall to the reinsurance or retrocession market. Johansmeyer also gave some colour on previous major insurance and reinsurance industry SRCC events, what to think about in the industry loss warranty (ILW) market and explained what industry participants should be thinking of going forwards.

Our latest podcast episode provides a review of the record levels of catastrophe bond and related insurance-linked securities (ILS) market issuance from the fourth-quarter and the full-year 2020. The catastrophe bond market broke records in 2020, with issuance reaching a new high of $11bn of property cat bonds, or $16.4bn if you include other classes of business and mortgage insurance-linked securities (ILS). Artemis tracked very one of the transactions and in this episode we explain some of the important details of Q4 and full-year 2020 catastrophe bond issuance, highlight some landmark deals and look ahead to 2021 for the ILS market. Market conditions look strong and the return potential from portfolios of cat bonds has risen for investors, as it has across the reinsurance linked investments space. Underscoring issuance records, were a number of new sponsors and interesting highlights, such as the first catastrophe bond from a tech-giant as Google parent Alphabet Inc. came to market twice. Alongside that, another first saw an asset manager using a cat bond to hedge earthquake risk from its portfolio, something we believe could herald further interest from asset owners and holders to leverage the ILS market to carve out and transfer climate, weather and catastrophe risks from their portfolios.

This podcast episode features an executive roundtable discussion we held in December 2020 that brought together industry participants to discuss key issues related to the insurance-linked security and catastrophe bond market’s readiness for and adoption of Environmental, Social and Governance (ESG) practices. This roundtable discussion sought to gain an understanding of the consequences of non-ESG compliance in insurance risk transfer; to identify starting points for improved compliance; alongside an exploration of the needs of the market and investors. After an overview of the status quo around the implementation of the ESG framework in the European Union (EU), the conversation shifted focus to the ILS space and specifically, whether or not ESG is being sufficiently considered in the market at this time. Industry experts noted that there is much more to do, on embedding ESG practices within insurance-linked securities (ILS) and catastrophe bonds. In particular, the ability to be truly transparent and show investors that portfolios of risk ceded to, or underlying, reinsurance and ILS transactions are ESG compliant remains a significant hurdle facing the market as it seeks to meet rapidly evolving investor motivations and needs.

Our latest podcast episode features an interview with Patrick Roder, Associate Partner and Global Head of ILS at Synpulse Management Consulting, who joined us recently to discuss the publication of a study analysing the results of our survey on the maturity of environmental, social, and governance (ESG) practices in the risk transfer, reinsurance and insurance-linked securities (ILS) markets.  Market participants across risk transfer, including insurance-linked securities (ILS) and reinsurance, have a lot to gain from further operationalising Environmental, Social and Governance (ESG) within their core businesses, the now published study reveals.  During the third-quarter of 2020, Artemis teamed up with boutique consulting firm Synpulse to conduct this survey on the maturity of ESG practices within the risk transfer, reinsurance and ILS markets.  During this interview, Roder explained why Environmental, Social and Governance (ESG) factors have become such a hot topic in risk transfer and why this is relevant to the insurance-linked securities (ILS) market as well.  "The concepts that stand behind ESG are not new at all. In fact sustainability is at the very heart of the risk transfer market.  "Some players might have had a more narrow definition of what that means, but others have pretty early on already had a broad definition and actually also been driving the definition of sustainability themselves," Roder said.  "So it's not like this subject has become suddenly a hot topic for the reinsurance and ILS market, but it has built up overtime," Roder continued.  "It's true that in ILS and reinsurance it has been a bit more recent compared to other parts of the financial industry, but that's probably just because the asset class of ILS and the underwriting side of the insurance and reinsurance industry is a bit more complex, when you look at the value chain, all the parts you have to look at. It's much more complex than analysing an equity investment.  "So I think the market needed some time, to build up this pressure and also the know how to put more focus on the topic of ESG."  The interview went on to discuss the inherent ESG qualities of reinsurance and ILS, but also why true ESG compatibility requires much more transparency and disclosure in the market chain.

After our last podcast on the importance of being good custodians of capital, thought it might be interesting to discuss the potential for recency bias among investors that are pouring capital into the market right now. In this episode we discuss whether the cycle is dead, changed for good, or whether some people have just forgotten recent history and may be making decisions based on the reinsurance renewals of the last year. Forgetting how the reinsurance market changes over the last decade to fifteen years could be a critical mistake and those bringing money into the market right now really need to be asking why now is the right time, how it's going to be used differently to be more effective and deliver better returns, and what the company they're funding plans to do to ensure these returns can be delivered sustainably and not just in a small window of opportunity.

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."