One of the ongoing trends within the ILS market over past years has been an increasing demand from existing investors to look for something different within their portfolio.
After starting out in catastrophe risk, and having seen margins in that business fall from their post-Katrina peaks, some early investors are increasingly keen on different types of insurance underwriting risk.
Of course, many are still happy with pure catastrophe risk, and see no need to broaden further a pool of risk that is already a diversifier for their overall portfolios.
But for those that are considering such a move, there is a wild and wonderful range of risks out there – many of which are ultimately covered by Lloyd's of London insurers amongst others, from fine art theft to the political violence underwriters covering riot damage to cyber hacks.
However, before they start weighing up due diligence of partners and potential returns, considering a shift in ILS focus will first require investors to take a step back and consider what it is they are looking for from their insurance portfolio to assess how and where they want to broaden out.
After all, the reason the ILS market got started in the catastrophe sector is that peak hurricane risk was expensive for existing (re)insurers to take: ratings agencies applied additional capital loadings to these peak risks to ensure carriers did not take on more than they could afford to pay out.
In contrast, niche lines of business can be heavily sought after by (re)insurers as a diversifier to their portfolios because they can be written at a lower cost of capital. This means competing in a more crowded space, so prepare to be sharp-elbowed to find the right partners.
Structural questions and the cost of best accessing the market will also become increasingly important, particularly if considering taking risks with a longer-term horizon that generally rely on a component of investment return alongside pure underwriting return to get to overall targets.
Naturally, most investors are looking to their ILS portfolio to provide something different than the market risk they have elsewhere. But they also have existing investment portfolios that could be supporting their ILS portfolio – so you can see the possibility of creating structures that produce underwriting income as an additional source of income on existing asset pots, rather than one that layers on additional financial market strain.
As the ILS market has matured and gets more diverse, it will also become more complex – but the Trading Risk ILS Investor Guide aims to help demystify the market and hold it up to investor scrutiny.
To view the H2 2021 edition, click here.
