AI could level the playing field for ILS managers

AI could help smaller and newer ILS managers compete with established players by reducing the resources needed to analyse complex reinsurance risks, according to Ben Fox, co-founder and CIO of Members Capital Management.

The technology could reduce some of the analytical advantages traditionally enjoyed by larger managers, while making reinsurance risk more accessible to investors.

“AI’s greatest impact is as a leveller. It lets a smaller, newer manager build the institutional-grade analytical capability that once required a large quant team, and makes serious diligence faster and more efficient,” Fox told Bermuda:Re+ILS ahead of ILS Bermuda Convergence, held October 12-14.

For investors, AI could also help address one of the long-standing challenges associated with ILS: understanding the complex risks and structures underpinning an investment. “AI is very good at translation – turning a dense offering document or a complex structure into what actually drives the risk and return, so an investor can interrogate it on terms they understand,” Fox explained.

Fox also sees an important role for blockchain technology in widening participation in reinsurance risk.

He distinguishes between AI as the analytical layer, supporting the understanding and structuring of risk, and tokenisation as the access layer, determining how investments are held, transferred and made transparent.

Combining the two could improve settlement efficiency, collateral transparency and fractional ownership, with the longer-term potential to support secondary market liquidity.

These developments could help lower some of the barriers that have historically limited access to ILS, although Fox stressed that broader participation must not come at the expense of investor suitability. “Reinsurance is a diversifying tail-risk asset, and the aim is to widen access to investors equipped to understand it.”

Greater automation also raises questions about how investors assess the reliability of analytical outputs. Fox believes technology should support scrutiny rather than replace it. “We treat the model’s output as the start of the conversation, not the end. In ILS, trust is earned by explaining your investment process and products, not hiding behind the numbers.”

Despite the potential changes to market access and investment processes, Fox does not expect technology to alter the fundamental economics of reinsurance risk. The cost of bearing that risk will continue to be determined by capital markets and loss experience, while origination relationships, underwriting expertise and diversification remain central to successful investment strategies.

Instead, technology could broaden participation and reduce the importance of analytical scale as a competitive advantage, placing greater emphasis on the quality of investment decisions. “The edge moves from the biggest machine to the best judgement,” Fox concluded.

Did you get value from this story? Sign up to our free newsletters and get stories like this sent straight to your inbox.