Clear investment principles & judicious selection, key for ILS managers: Ruoff, Schroders Capital

As the insurance-linked securities (ILS) industry looks towards the end of year renewals, Stephan Ruoff of Schroders Capital told us that ILS managers need to maintain clear investment principles, stay disciplined and be judicious in their selection of risks and counterparties.

Speaking with Artemis around the time of the Monte Carlo Rendez-Vous event, Stephan Ruoff, co-head of Private Debt & Credit Alternatives, and the Chairman of Insurance Linked Securities at asset manager Schroders Capital, highlighted what he sees as key topics for the ILS sector as the reinsurance renewal discussions begin.

Focusing in on the importance of sustained discipline and fiduciary duty to investors, Ruoff noted that ILS investment managers still have some uncertainty ahead and challenges to overcome.

First, he explained that, given the time of year, the, “Annual assessment of tropical cyclone season’s impact is crucial for reinsurance market predictions before year-end renewals, especially in Florida.”

Ruoff went on the explain that, “Despite a strong performance by ILS and the reinsurance industry in 2023 and into 2024, challenges remain.

“These include underwriting and pricing discipline due to historic inability to sustainably cover cost of capital, increased market volatility, economic uncertainty, and higher capital cost.”

Adding that, “Notably, 2023 was exceptional for ILS, attributed to no major losses, recovery post-Hurricane Ian, and a hard market environment.”

But despite this, the demand side of the market is responding still and Ruoff told us that, “Economic and population growth, alongside inflation, continue to drive the need for reinsurance protection, with supply and demand expected to stay balanced barring unforeseen events.”

There is a need for the ILS industry to hold its ground on the terms and structures in the market, as insured losses were once again driven by so-called secondary peril events in the first-half of this year, Ruoff pointed out.

He also told us that the impact of climate change is increasingly evident on these risks, such as severe storms, wildfires and localised flood events.

Ruoff told Artemis, “Economic and insured losses are expected to remain high, with secondary perils like severe convective storms in the US notably influencing losses. This necessitates a portfolio strategy focused on avoiding secondary perils and preferring occurrence structures with lower attachment probabilities.”

“As ILS managers, maintaining clear investment principles and strategy ahead of renewals is paramount, including understanding and responding to the risks posed by secondary perils such as US severe convective storms,” he further explained.

Going on to say that, “Managers must select counterparties judiciously. Likewise, service providers require careful selection, with due diligence and know your client being crucial for the underwriting process.

“Maintaining underwriting discipline is vital, ensuring wordings and alignment of interests between cedants and capacity providers are balanced.”

He went on to explain that, “Macro trends such as inflation, exposure concentration in high-risk areas, and global interest rates are pivotal in driving pricing assumptions and should be taken into account in risk transfer structuring and pricing.”

Adding that it is, “It’s crucial for ILS managers to understand the capabilities and limitations of models, with investors needing to formulate their own risk views to mitigate information asymmetry.”

Overall, Ruoff sees the need for the ILS market to stick to the disciplined capital deployment strategies that have been seen over the last year, with no major changes at renewals.

Yes there is room for some managers to deliver differentiated strategies, such as ones more focused on frequency risks, but that is not for everyone, Ruoff explained.

“There is scope for managers to have different strategies with their own risk/return profiles, and that’s fine. However, not all investors or managers are interested in providing earnings protection to the re/insurance market, and that isn’t the ILS market’s fundamental raison d’être,” Ruoff explained.

Concluding that, “Should re/insurance companies’ equity capital providers find their returns unsatisfactory, it would be prudent for the re/insurance market to enhance its pricing strategies and underwriting rigour, rather than transferring this burden onto the ILS market.”

Read all of our interviews with ILS market and reinsurance sector professionals here.