ILS market needs to defend improved terms & conditions: Grandi, Twelve Capital

The insurance-linked securities (ILS) market needs to defend the gains it has made in improved terms and conditions, making sure technical underwriting standards are maintained, Marcel Grandi of investment manager Twelve Capital has said.

Speaking to Artemis around the 2022 Monte Carlo Rendezvous reinsurance event, Marcel Grandi, Head of ILS Sourcing at Twelve Capital explained the importance of holding steady on contract term improvements.

Over a number of renewal seasons now, reinsurance and retrocession terms and conditions have been improving, from the underwriters point of view, while pricing and rates-on-line have been firming.

Given the macro-economic environment and the trends in catastrophe losses over recent years, Grandi feels the industry should defend its gains.

“We have apparently reached a harder reinsurance and retrocession market phase. Across the ILS market (private as well as cat bonds) we have seen a certain improvement of underlying terms and conditions (including contract language).

“This trend has to be actively defended, continued and reinforced by the ILS market,” Grandi told Artemis.

During the interview he continued to explain that, “Sound technical underwriting standards need to be maintained under particular consideration of the present inflationary trend as well as climate change and its impact on modelling and pricing.”

Adding that, “Inadequate structures and business models should be avoided as has been seen in the cat bond market this year.”

Speaking about some of the challenges that face the ILS and reinsurance market at this time, Grandi said that there are factors in play that can make the investment case more challenging for certain ILS structures.

“The present geopolitical tensions, the war in the Ukraine, inflation and rising interest rates as well as the climate change debate intensified by this year’s record drought will make investment decisions for more illiquid strategies as ILS more difficult,” he said.

“This is particularly true for pure private ILS strategies, to a lesser degree for cat bond strategies, which have proven their value as an asset not correlated to the broader financial markets.”

Adding, “The poor performance of many private ILS strategies over the last 6 years, also impacted by non-cat events as COVID-19 or aviation associated with the formation of illiquid side pockets and the ongoing locked collateral issue continue to be a challenge to expand the private ILS market also for successful private ILS strategies.”

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