Schroders chairman of ILS Stephan Ruoff questioned whether casualty and run-off risks will be more of a “come-and-go" element of the ILS market, during a keynote speech at the ILS Connect event in New York.
In contrast in core catastrophe risk strategies, Ruoff affirmed the expectations that hurricanes Debby, Helene and Milton will not have a major impact on the performance of ILS strategies.
Ruoff suggested this will result in a positive outlook for the rest of the year.
The ILS market has seen an increase in positive investor sentiment post-Ian, leading to larger allocations to the space.
Allocations have largely been driven by the diversifying nature of ILS, its lack of correlation and generally being income generating, according to Ruoff.
The cat bond market has seen growth, driven by UCITS funds that now represent 25% of the cat bond space and 10% of the total ILS market by AuM.
However, Ruoff cautions that the current European Securities and Markets Authority (ESMA) review into the 2007 directive on UCITS-eligible assets shows that regulatory concerns, not just insurance and reinsurance performance, can threaten the market.
Demand for risk transfer is at record highs, generating ILS growth, with the allocation of risk transfer capital to ILS hovering at around 15%.
“Demand for protection has gone up significantly, risks transfer needs have gone up, with losses and inflation a driver,” Ruoff added.
“I am almost convinced that we will continue to see that [demand growth] due to demographics and climate change.”
Casualty ILS questions
Several casualty ILS sidecars have been done over the past year.
Ruoff believes that while liability risk can be a “very valuable diversifying component of an ILS strategy”, there are questions around exit mechanisms and internal rate of return calculations that need to be answered.
“Personally, I am not convinced that ILS structures are the best ownership for casualty risk, however if there is a valid reason to take these risks off an insurance balance and provide investors with a proper outcome, I think there is an opportunity,” Ruoff said.
The Lloyd’s market with its reinsurance-to-close mechanisms provides an example of how casualty risk can work for third-party capital, he added.
Ruoff also described parametric deals as a come-and-go element of the market, noting that its re-emergence could be helped by technology but that it was probably not a “new nirvana” for the market.
With regards to new elements, cyber and tokenisation were mentioned by Ruoff as holding new long-term potential.
“Looking into the future, cyber risk is going to be a major risk driver off insurance balance sheets, and there has to be a way to take these risks as we’ve done with natural catastrophes,” Ruoff noted.
For tokenisation, Ruoff believes it has the potential to make the industry more efficient.
ILS returns
Ruoff believes that there is space in the market for private ILS products at a more remote-risk level.
He noted that when comparing the Swiss Re Cat Bond Index to the Eurakehedge ILS Advisers over a 10-year period, cat bonds have significantly outperformed.
But using an internal Schroders Index that tracks the performance of remote risk ILS strategies that include private ILS deals as well as cat bonds, the returns over the same period very closely track the Swiss Re Cat Bond index.