Prudent underwriting can expand investor interest in ILS: Twelve Capital’s Grandi

Investor interest in insurance-linked securities (ILS), particularly on the private ILS and reinsurance side of the market, can be enhanced with a continuation of the prudent approach to underwriting currently being seen, Marcel Grandi, Head of ILS Sourcing at Twelve Capital told us.

Grandi of Twelve Capital, the Zurich-headquartered insurance-linked securities (ILS), catastrophe bond and reinsurance investment manager, spoke with Artemis around the time of the Monte Carlo Reinsurance Rendez-Vous and explained that updates to underwriting terms and conditions need to be sticky.

Grandi explained that in the current environment, it appears that average annual insured losses of more than $100 billion are the new normal for the insurance, reinsurance and ILS market.

While 2023 has not seen any very major single industry loss events, the accumulation of severe weather and catastrophe losses come with their own challenges for the industry.

“So far weather-related events, as the series of severe convective storms and winter storms in the US, floods and disastrous wildfires in parts of Europe, Canada and Hawaii, unprecedented in history appear to be the drivers for insured losses,” Grandi explained.

Adding that, “The effects of climate change are clearly noticeable in record high temperatures and the prevalence of weather-related natural catastrophes. These weather-related claims trends need to be considered in underwriting.”

Grandi believes that loss trends, alongside improvements to terms and conditions, suggest that reinsurance pricing and results should remain more resilient against a significant softening this time around.

“The trend in increasing frequency of events should support the present elevated pricing level and even allow for certain upward price adjustments for the coming renewals,” Grandi told us.”Recent reinsurance price increases should also support retrocession pricing levels.”

Going on to advise that, “Certain structural enhancements as elevated general retentions, limitations of the scope of coverage, clear definitions of the covered natural perils, high event deductibles (in the case of aggregate structures) have to a certain extent been achieved in last year’s renewals but should be optimized further to reflect the apparent trends in insured losses.

“The modelling outcome for certain secondary perils may be challenged. The question of the insurability of certain secondary perils may be raised.”

However, one of the other areas of concern, inflation, is already being dealt with in the modelling, Grandi believes.

Saying, “Inflation, the big topic at last year’s Monte Carlo appears to be well addressed with inflation adjustments being applied in the modelling analysis.”

Before continuing to explain that, “The promise of a continuation of a prudent underwriting approach should help to expand investors’ interests again, also into strategies with more private ILS content.”

However, Grandi acknowledged that while ILS structures have been enhanced and made more resilient, through higher pricing and adjustment to terms, there remains one risk that everyone faces.

Saying that, the biggest challenge for 2024 is that, “Considering the loss activity in 2023 the biggest challenge remains the management of the effects of climate change in ILS structures.

“This includes a closer look into the modelling quality for certain secondary perils as well as possible structural adjustments.”

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