Hurricane Ian to drive further ILS industry evolution: Frontier Advisors

The losses and resulting fall-out after hurricane Ian, as well as the inevitable hit to investor sentiment, is likely to drive further evolution of the insurance-linked securities (ILS) industry, which could help to address some investor concerns, Frontier Advisors believes.

Frontier Advisors, an Australian independent investment consultant with an insurance-linked securities (ILS) specialism, sits in the camp that believes the ILS market and its constituents can respond positively to the impacts of hurricane Ian by effecting positive change.

Over the course of its twenty year or so history, insurance-linked securities (ILS) and catastrophe bond market participants have been very responsive in trying to address any perceived short-comings of the sector.

While hurricane Ian itself is a particularly significant loss event for reinsurance and ILS markets, it perhaps hasn’t shown up so many immediately identifiable short-comings, aside from price adequacy.

But it is likely to drive a similar period of reflection on the ILS product and investment offering, driving efforts to change and improve, hopefully to the benefits of cedents as well as investors.

For cedents, permanence of capital availability is a key trait of reliable risk and reinsurance capital sources and so retrenchment and trapped collateral are possible issues that need addressing to maintain broad cedent confidence in the ILS product offering.

That said, the way the catastrophe bond market is functioning at this time shows cedents remain confident in its offering of collateralized reinsurance capital, so hurricane Ian may not have been so much of a hit to cedent confidence, as one to investor confidence.

The reason investor confidence has been affected by hurricane Ian, is in the main the fact it is another loss that causes stress to the sector, trapped collateral and an erosion of returns.

But there are also product-specific ways the industry can work to readjust or reset itself, and we’re already seeing this in progress.

“Similar to previous large loss events, there is broad 30 consensus that the sector will continue to learn and
evolve,” Frontier Advisors explain on hurricane Ian’s effects on the ILS sector.

They go on to say that, “Potential changes may include re-pricing and re-structuring contracts assuming greater frequency and dollar impact from insurable events, changes to premium structures both pre and post event occurrence, behavioural incentives to reinforce discipline in the reinsurance market and legislation changes.”

All of the above are being seen, most clearly in the reinsurance renewals, or terms of recent catastrophe bonds, but mirrored in negotiations over other collateralized reinsurance and retrocession placements, we understand.

Other areas of focus can be, “Changes to transparency and information availability; different ways to address, manage and set expectations for peril frequency and impacts; valuation, loss evolution and trapped capital solutions,” Frontier Advisors has said.

But, still there is a reduction in investor sentiment towards the space, so ILS managers need to be able to evidence these changes and also make clear to investors how they are resetting their own strategies, to suit the new harder reinsurance market environment and to deliver on investor expectations.

Frontier Advisors also noted that investors that chose to “wait and see” how ILS performed through 2022, may still have reduced appetite in 2023, perhaps prolonging their entry to the sector as well.

While the balance-of-power has clearly shifted to risk capital providers, ILS fund managers and investors included, there is still a need to aim for continuous improvement, learning from the outcomes experienced over each year and putting those to work in evolving the product, on the protection and investment sides.

We’ll discuss many of these issues, as well as the continued evolution of this market at our next ILS conference. ILS NYC 2023 will be held in New York on February 10th. Please register soon if you want to attend.

It’s critical that ILS managers demonstrate their ability to move forwards from major losses while continuing to evolve what is still a relatively young product-set.

We’ve seen evolution each year of late, with terms being tweaked and adjusted, while ILS managers also address structural inefficiencies and find innovative ways to deal with issues such as trapped capital.

Moving into 2023, the hardening reinsurance market provides an opportune moment to double-down on this contining evolution of the ILS asset class.

Summing up, Frontier Advisors said, “There is broad industry expectation of Hurricane Ian leading to
further industry evolution and changes.

“These changes have the potential to bring positive change which could assist in addressing some of the negative investor sentiment and concerns following several years of losses.”