Panelists at ILS Connect 2024 in New York City were challenged about whether ILS coverage is now too remote from the risk, after participants noted that an industry loss from Hurricane Milton of $30bn-$40bn would have little to no impact on many strategies.
The bigger test to the ILS market writ large would have come from an event causing an industry insured loss in the range 50bn-$70bn, the panel commented.
This meant that Hurricane Milton could shape up as a “proof of concept” event for the ILS market, serving to validate structures – including higher retention levels – that have been implemented over the past 24 to 36 months.
Jessica Laird, head of property cat at Nephila Capital, said that Milton can be seen as a “validating event” for the market.
“It’s a little bit of proof of concept, a chance to demonstrate that there is profitability to be had in this asset class when you've had a year of events. It’s a chance for us to test that a lot has changed. Does it validate the adjustments we've seen in terms of structure and attachment levels, and where rates are, [as well as] the reforms in Florida?”
Richard Pennay, CEO at Aon Securities, said there was a question over whether ILS have become too far removed. He said: “A lot of ILS markets would prefer rate softening to coming down in attachment level. It's about our clients getting meaningful protection. If we find that ILS products are all too remote then ultimately, when clients look to hedge out and seek protection, it can become problematic if everybody is hanging out at the $100bn level.”
However, Dominik Hagedorn, co-founder, Tangency Capital, said that some ILS investors would be more at risk. Those who had come in with the aim of benefitting from dislocation – those who were more comfortable with volatility risk – are “probably going to be more exposed to lower layers, and should see a break-even-ish or down-ish experience for 2024.”
However, longer-term allocators in medium risk and low risk strategies are “probably pricing these types of events into their performance, because we keep having them every other year”.
He continued: “That’s been some part of the promise that the industry has made to its investors following the difficult years we had in 2017 onward. I suspect most of these strategies are doing okay and will deliver somewhere in the range of what they set out to do.”
Mitchell Rosenberg, MD at Howden Capital Markets & Advisory, said that flight to quality was going to be even more emphasized than it was last year, because after an event you can gauge whether people were outperforming the model or if they were staying true to their underwriting guidelines.
He added that there would “obviously still be some trapping and collateral held back, given how close we are to the end of the year”, but that this did not change the broker’s view “in terms of the market being able to trade and capital being available” for deployment in 2025.
David Govrin, group president and global CUO at Sirius Point, added that from a buyer’s perspective, there continues to be “a lot of demand for collateralized reinsurance and that demand’s not going to go away”.
But exit solutions to avoid trapped capital needed to be at the forefront to encourage investors away from the cat bond market to private ILS deals.
Govrin said: “It's incumbent upon the intermediaries, the asset managers and the brokers, to come up with the creative solutions between the supply and the demand. The ones that do it better and are more creative, will attract more of the supply.”
The panel also discussed developments in casualty ILS, noting that the asset class could be classed as somewhat different to more conventional property cat-driven ILS in that it includes a significant proportion of investment return.
Pennay said: “It's certainly a different pool of capital. We're looking at large asset managers that are seeing value in these types of trades. It’s predominantly a function of interest rates. These investors are able to really get aligned with the client and have that risk transfer, but also act on behalf of that client in managing the assets to ultimately develop a structure that is mutually beneficial.”
Hagedorn added that transacting casualty ILS deals went beyond just the head of ceded re to also include the entire finance team at a ceding firm. “You need to get a lot more people comfortable in getting these deals done.”