As reinsurance and ILS have become more sophisticated, so have some of the collateral solutions they rely on. Robert Quinn of Wilmington Trust reflects on the evolution of these industries.
In May this year, it was brought to my attention that I have been solely focused on discussing reinsurance trusts around the industry for 20 years. Not quite dating back to the rotary phone, but long before the advent of FaceTime.
Reinsurance trusts are used as a way to collateralise reinsurance, insurance-linked securities (ILS), and many other types of insurance programmes. The idea is to place cash or cash equivalents into an account that, when structured properly, acts as a bankruptcy-proof financial guarantee for said insurance programmes.
Much has changed in the world of reinsurance trusts over the past 20 years. Services levels, asset rates of return, and repercussions from the 2008 financial crisis have all shaped the reinsurance trust environment we have today.
In many ways, trustees learned a lot from some of the difficulties experienced. Understanding and learning from the past is key to success in the future. The alternative is failure. As philosopher George Santayana said, “Those who cannot remember the past are condemned to repeat it.”
With this in mind, I’d like to share some experiences from trustees over the past two decades to help our industry continue to succeed.
One issue that many trustees have struggled with over the years is the level of service and responsiveness they offer their clients. The reasons can be many, but one of the main factors that I’ve observed on this front was that some banks reorganised away from an approach that I would call “client/relationship manager” to “client/trustee responsibility silos”.
For example, in my early days—using the client/relationship manager model—a relationship manager would bring in a trust, review the documents, collect the onboarding information, establish the account, negotiate and circulate the trust agreement, and receive the incoming funds.
The trust was considered funded and the work done. At that point, the client was free to call either the relationship manager or his/her designated assistant for any and all of their needs (account statement, reports, etc).
This approach has changed at a number of trustees. Now, many are employing the client/trustee responsibility silo model. This means that different teams—silos—all work on the same transaction, but not necessarily working together. For instance, you might have a document review team that deals with the trust agreement, a “know your customer” (KYC) team that collects the onboarding information, and the account servicing team that takes in wires or helps with online reporting.
It is hard to list all the issues a service setup like this can cause. At a minimum, the client would need to sort out whom to call from one of three teams to resolve issues—a confusing and frustrating client experience that leads to delays, and that is a recipe for failure.
The Wilmington Trust Insurance Collateral Solutions (ICS) team employs a system of client/relationship manager, and we avoid client/trustee responsibility silos. We have set up our team the way we know works: given Wilmington Trust’s ability to be nimble and our reputation in the corporate trust space, we are able to operate in a way that makes the most sense for our clients.
The ICS team has received numerous awards and accolades in its five years of operation. I attribute this to our approach. I am deeply proud of our team, which many in the industry would recognize: Todd Winchel, Robert Bilodeau, Mike Ramsey, Jose Alcantara, Scott Wetzel, Katie Whitestone, Newmann Marlett, and Mary Morales.
Client onboarding and KYC
This is a tough one for many trustees. Much of the change over the past 20 years has been as a result of two factors: the USA Patriot Act and the 2008 financial crisis. The Patriot Act created far more scrutiny of most types of accounts at financial institutions—money laundering and terrorism funding being two important issues. There was not much wriggle room for a bank when dealing with the US government. Then came the financial crisis.
This made things worse for banks, and wounds (financial and reputational) were often self-inflicted due to careless mistakes. To be clear, we are all subject to the same regulations and information-gathering requirements, but here is where some banks fell down.
Within the world of corporate trusts, there are many services offered with somewhat different KYC information requirements: escrow, indenture trustee, asset-backed trustee, mortgage-backed trustee, structured finance trustee, and so on.
Some banks (to protect themselves) created what I call a “master KYC checklist” that was provided to all clients regardless of their product needs. This list would cover all KYC requirements for all products. Therefore, in the reinsurance trust world, when a client went to one of these banks with a new deal, they were burdened with a fairly large onboarding packet and questionnaire, often asking for information that the client wasn’t in a position to provide (at least not in a timely fashion).
Closer to our industry, a self-inflicted wound I heard about the most was the trouble it was causing to reinsurers and ILS funds.
At Wilmington Trust, we seek to ask of the client only what is absolutely needed so as not to burden clients with unnecessary work.
We have an extremely streamlined (and highly compliant) onboarding process that allows us to obtain the information requested of the client and have accounts open within two days.
Rates of return on trust assets
There is one area where I have seen very little change, and for all the right reasons. Assets held in trusts are typically cash (earning interest), cash in AAA-rated US Treasury funds, or in actual short-term US Treasuries.
The reason is fairly simple, and I have heard it countless
times from industry partners: “I have enough insurance risk.
I don’t need investment risk as well.” Or, “I want to be able to sleep at night.”
Many reinsurers and ILS funds have ultra-conservative investment guidelines written in their own prospectuses. A further reason that they might take such a conservative approach is that many are looking for investors. Having liberal investment criteria might be off-putting to investors.
One thing I have seen lately is much larger overall interest in the rate of return on even ultra-conservative trust investments. When I started in the industry in 1999, US Treasury rates were just under 5 percent. Then, during the financial crisis, the rate of return was about zero for money market funds and about 1 to 3 bps on treasuries.
This went on for years. During this period, there was really nothing for the conservative depositors of these trust funds to do but now, many money market funds are above 180 bps and US Treasuries are similarly positioned. All good news. However, as of this writing, the US Federal Reserve is talking about lowering rates again, pushing everything down. The to-and-fro of rates continues.
These are just a few of important changes in the industry that come to mind and are based on my various conversations about positive and negative developments in the reinsurance and ILS trust space.
Our industry continues to evolve so we must evolve with it to be successful and provide value to our clients. We should remember what has come before, but not let the past keep us from moving forward.
Robert Quinn is the vice president and business development manager of insurance collateral solutions at Wilmington Trust. He can be contacted at: firstname.lastname@example.org
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