ILS investors cautious, but interest is growing: AM Best at ILS NYC 2023

There is lots of interest in the insurance-linked securities (ILS) market, but any incursion of capital is going to be gradual and cautious as investors continue to be more hesitant to enter the market, said AM Best’s Carlos Wong-Fupuy.

Speaking with AM Best TV at Artemis’ annual ILS conference in New York City, the agency’s senior director for global reinsurance said that several investors are waiting to see what others do, like those who experienced significant losses in the last few years.

“The pricing environment, and terms and conditions have improved significantly since the renewals, but we still see investors in the ILS side being very hesitant entering the market,” said Wong-Fupuy.

“I think that several of them are still waiting to see what the others do, and it all depends on the nature of these investors. Those which have experienced significant losses in the last few years, which have had difficulties meeting their cost of capital definitely are showing investor fatigue.”

He also suggested that a number of investors are still waiting to see at least a couple of years of clean results.

Although the market is attractive and there is a lot of interest, he warned that “any new incursion of capital is going to be still something gradual and cautious” and highlighted that patience will be needed to see how things will develop this year.

When asked about the potential role of ILS outside property cat risk, Wong-Fupuy said that there has been more interest in new lines: “Areas like cyber, casualty and specialty, are some of which there are some small amounts where investors have shown initiative. But I think again, that’s going to be a gradual process.”

He noted that there are some issues regarding modelling and uncertainty, for example, which are a significant challenge.

“The liquidity, the ability to novate, enter and add to the capital quickly, again is something that is, outside property cat, is more difficult to resolve,” he added. “But definitely we see investors trying to show a more diversified portfolio of risks before they enter the market.”

Not long ago, ILS used to be seen as a direct competitor to traditional capital and the main culprit of periods of rate softening. But in the last few years – after the expansion in the ILS market – that competition between traditional capital and ILS is something that has changed, according to Wong-Fupuy.

He said: “We see more ILS and traditional capital as partners. We have a number of large traditional reinsurers actually using ILS to diversify and protect their balance sheets. And I think that that’s likely to continue.

“Obviously, areas where we have lines of business with very high capital intensity are more likely to benefit from this contribution from ILS platforms that several major players are trying to reinforce.”

View the full video interview from AM Best TV below:

Read more coverage of our ILS NYC 2023 conference:

– Potential for cat bond market to double, say ILS NYC 2023 speakers.

– Enablers helped private ILS become an important part of the market: ILS NYC 2023.

– Optimism on Florida, but capital may not be quick to jump back in: ILS NYC 2023.

– Transparency key for investors as ILS looks to cyber and beyond: ILS NYC 2023.