ILS sector should focus on lines of business that need capital: ILS NYC 2023

Attendees at Artemis’ annual insurance-linked securities (ILS) conference in New York City heard from industry leaders and experts about where the sector should go next, as it continues to explore new lines of business amid a hardening catastrophe marketplace.

“We’re coming off of going on six years of heavy cat losses. The need for diversification has come up at every one of these panels for longer than I’ve been in the market. So, this brings up the question of where do we go next? Where can we go next? Where should we go next?” questioned moderator Tom Johansmeyer, Head of PCS, Verisk Insurance Solutions.

Given how much capital is needed in the catastrophe risk transfer space, highlighted by the fact 2022 was another year in which annual insured losses from cats exceeded $100 billion, and by some way, it’s not surprising that it remains the core focus of the ILS space.

But alongside greater sophistication and understanding of the asset class among the investor base, the marketplace has evolved, fuelling the debate around non-cat risk and where might ILS go in the future.

According to panellist Michael Millette, Founder & Managing Partner, Hudson Structured Capital Management (HSCM), we could go a little bit back to the future.

“After six difficult years, we do have a bit of a capitulation that is finally driving some value back into certain parts of cat. And it’s tricky because what we’ve lived with for the past six years, is a steady competition between rate and loss trend, and rate was losing for the most part, until this year,” said Millette.

“We have to look at the fact that actually in the cat bond market, in the upper stretches of the ILW and retro markets, rate-to-expected-loss is as good as it has been. So, let’s not forget that over the past 25 years, this has evolved, and it’s been a useful source of diversification and it’s gone through a tricky adolescence… but we’re getting through it,” he added.

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In terms of the areas that are most interesting to HSCM outside of cat, Millette noted the broad life insurance space, which he said has been producing very good risk return.

“There are interesting things to do in insurance debt. There are sectors of specialty that have hardened. So, we’re back in 1997 in terms of risk returning cat, but we have a broader beachfront that is starting to actually produce deal flow, and I think that we should be embracing that,” he continued.

The day’s fourth panel also featured Julia Henderson, Chief Commercial Officer at Vesttoo, the ILS focused insurtech company which does not operate in the catastrophe space.

She explained that Vesttoo is living in the now, and that insurance is finally catching up to the rest of the world in terms of technology.

“However, one thing that we’ve done very poorly, I think in insurance and specifically in the reinsurance space, I shouldn’t speak for the entire P&C market, but what we’ve done poorly, I think, is utilise these technologies to allow investors to gain comfort with the asset class.

“I think we all agree here, I don’t think anyone will find this controversial, this space and specifically reinsurance is opaque. It’s illiquid. There are features of this asset class that make it incredibly difficult for any investor, cat or not, to get comfort,” said Henderson.

Henderson is now working outside of the cat space for the first time in her career, which she described to the audience as extremely exciting.

“One thing that we’ve learned is that the technologies we built over four years are resonating with these investors that, what we can do is provide a transparent, objective risk price in non-volatile lines for investors to gain comfort. And so, that’s I guess the future, as you would ask, but I’d say it’s more the tech is now just being applied that’s existed,” she added.

Panellist Chris Caponigro, Global Head, AXIS ILS at Bermuda-based re/insurer AXIS Capital, is also living in the non-cat world, and in light of this, was questioned by Johansmeyer on what’s attractive right now, and what might be attractive in the future.

“I think when we look at ILS and practitioners and what we bring to the overall insurance and reinsurance ecosystem as we bring private capital to the balance sheet underwriters, and principally, I think what we need to do is look at what lines of business will need capital,” said Caponigro.

“Rather than just trying to create activity with new capital that people may have raised from investors, just for the sake of generating AuM, or activity or diversification, really, fundamentally have to ask why do I need this capital? And that why should be based on profitability, growth expectations of that asset class, and the sheer need to bring that capital in long-term,” he continued.

According to Caponigro, property does ask that question of why, and needs to be there as in inflationary times, like now, there’s not enough capital and nor will there be in the near future to be able to meet the growth of insured values.

“And then you look at the next asset class, Mike mentioned cyber, right, and that has every potential to need more capital than any of the balance sheet companies or fund managers that are out there today, to be able to satisfy the demand. Once that spigot opens it’s going to be bigger than property. And then you have to think, alright, what could be beyond that? And, I think, in today’s world very few lines of business come to mind that will satisfy that other than the first two,” said Caponigro.