A new breed of ILS investor finds opportunity in an established reinsurance ecosystem: Artex

The expansion of the ILS investor base is bringing together pools of capital that have traditionally approached risk from very different directions.

For Kathleen Faries, CEO, and Ben Wright, managing director, insurance management, at Artex Capital Solutions, this is particularly evident in the growing interest from private credit investors, whose existing investment expertise gives them a different lens through which to consider insurance risk.

“Private credit investors are interested in casualty because it has some of the same characteristics as other investments they may consider, and because they have the skills to analyse the underlying performance, particularly on the asset side of the trade,” Faries told Bermuda:Re+ILS.

“This differs from the approach to analysing shorter-duration ILS investments that are non-correlating and have been the mainstay of ILS up to this point,” she explained.

Private credit investors are not simply another source of capital arriving with the same objectives as existing ILS investors. Their experience of analysing assets, cash flows and longer-duration investments could influence both the risks they are prepared to consider and the structures through which they access them.

“The market is no longer drawing a hard line between traditional and alternative capital,” Wright said. “What matters now is how a broader range of investors can bring their own capabilities to insurance risk while helping the market develop structures that work for different appetites and return objectives.”

For the ILS market, that creates an opportunity to bring together capital markets and insurance expertise in new ways.

Different capital, different appetite

Faries sees a broader investor base as positive for ILS, but cautions against treating capital as homogeneous. “Broadening the investor base is a net positive, but each investor set brings a distinct appetite,” Wright said. “As ILS becomes an established part of reinsurance capacity, the focus is shifting from traditional versus alternative capital to how different forms of capital can work together.”

That diversity has implications for how insurance-linked opportunities are constructed and presented.

The appeal of catastrophe risk to ILS investors has historically included its ability to provide exposure that is largely uncorrelated with financial markets. Private credit investors considering casualty approach the opportunity with capabilities developed elsewhere, including the ability to assess the assets associated with a transaction alongside its underwriting performance.

For re/insurers, the attraction runs in the opposite direction. They are looking at how capital from outside the traditional reinsurance balance sheet can be deployed against risks whose characteristics might make alternative sources of capacity valuable.

The result is a point of convergence between investors looking for opportunities that fit their existing expertise and re/insurers looking for additional ways to finance risk.

“That convergence is reshaping the industry by bringing capital markets discipline and capacity into reinsurance, while also pushing the ILS market to become more sophisticated in how it structures, standardises and communicates risk,” said Faries.

More than a new source of capacity

As new types of investors enter ILS, Faries expects their influence to extend beyond simply increasing the amount of capital available. “I do think new capital will drive innovation as well as standardisation. When more investors come into the market, there is naturally more interest in developing structures that can meet different risk and return objectives,” she said.

Greater capacity might also intensify competition, making disciplined structures, transparent data and clear alignment with investor appetite and underlying risk even more important.

For private credit investors, the ability to consider the asset side of a transaction alongside underwriting risk creates a particularly interesting overlap. “The next stage of innovation is likely to be in the structures that connect capital with risk,” Wright said. “Sidecars, hybrid fronting, treaty MGAs and smart-follow arrangements all point to a more tailored market where institutional capital can access curated insurance risk in ways that better reflect its objectives.”

Casualty business develops over a considerably longer period than the catastrophe exposures that have traditionally dominated ILS. That makes the investment proposition different, but it also brings it closer to areas private credit investors might already know.

So the potential is not simply to persuade traditional ILS investors to accept a different type of insurance exposure. It is to connect insurance risk with investors whose existing capabilities might suit analysing some of the characteristics that come with it.

There are limits to how quickly that convergence can develop. Longer-duration insurance exposures bring uncertainties that cannot be understood solely through an investment lens. Faries points to social inflation, the legal environment, market risk and the way claims develop over many years as considerations associated with casualty.

Those characteristics increase the importance of combining investment expertise with insurance capabilities, including underwriting, analytics and claims.

“Casualty ILS demands real discipline because the risk develops over years, not months,” Wright said. “Social inflation, litigation trends and reserve uncertainty mean investment expertise has to be paired with strong underwriting, claims and actuarial capabilities.”

For private credit investors entering insurance risk, and for ILS managers and re/insurers seeking to work with them, understanding those differences will be as important as recognising the similarities.

The opportunity lies in bringing together complementary capabilities rather than assume one investment approach can be transferred wholesale into another market. Structures also need to reflect the duration and complexity of the liabilities they support.

As Faries puts it: “The best outcomes will come from innovation that is thoughtful, well-structured and grounded in a clear understanding of the underlying risk and long-term commitment required from all parties.”

The convergence between private credit and ILS is therefore about more than another pool of money discovering insurance. It brings investors accustomed to thinking about assets and longer-duration investments into a market historically built around a different proposition.

What they see in insurance risk, and how the ILS market responds to that perspective, could help determine how closely those two worlds ultimately converge.

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