Dedicated insurance strategies set to drive next wave of ILS capital
A decade of major loss events has reshaped how ILS investors assess the asset class, but for Adam Champion, CEO of capital markets at Price Forbes Re, one of the most important lessons has not been the scale of the losses themselves, rather how the market responded afterwards.
The experience has been built over several distinct periods. The catastrophe-heavy years of 2017 and 2018, and particularly the California wildfires, demonstrated that secondary perils could produce losses on a scale associated with traditionally dominant catastrophe risks.
Champion told Bermuda:Re+ILS, ahead of ILS Bermuda Convergence held October 12-14, that this prompted the market to question modelling assumptions around secondary perils more closely and adjust risk-return expectations accordingly.
Covid-19 provided a different kind of test, raising questions around event cancellation and other non-natural catastrophe loss drivers. Hurricane Ian in 2022 then provided another lesson, this time about the speed with which a significant catastrophe loss would translate into improved pricing.
“I don’t believe the extent of losses during those years stands out as a lesson learned necessarily, as for most managers the losses fell within the modelled expectations,” Champion said. “However, the market response, specifically from a rate perspective, was not as swift as many ILS managers expected.”
Following Ian, many expected immediate and material rate increases. Instead, Champion said those increases emerged more gradually over roughly two years. “This caused a brief dislocation in the cat market for about 18-24 months until such time that rates peaked again in 2024, before starting to soften on the back of benign cat years,” he said.
The lag between heavy losses and subsequent rate increases was a lesson for investors, Champion said, and has influenced allocation strategies. At the same time, the pool of capital making those allocation decisions is beginning to change.
Historically, much of the capital entering ILS has represented relatively small allocations, typically 2%-4%, “from very large, diversified ‘alternatives’ portfolios”. Increasingly, however, Champion is seeing insurance-focused strategies and funds established specifically to allocate to the sector. “This will be one of the largest drivers of inflows into ILS over the next decade as insurance becomes a stand-alone dedicated strategy for more institutional investors,” he said.
Changes in the investor base are already helping support activity outside traditional property catastrophe risk. Champion highlighted the arrival of private credit managers with longer-duration appetites and lower return hurdles, which has opened up new lines of business within casualty. He estimates that at least a dozen casualty ILS transactions have been executed over the past two years, representing several billion dollars of premium.
“Diversification is not necessarily the driver to allocate beyond property cat as the risk/return profile for non-cat business is attractive on a stand-alone basis,” Champion said.
But moving into casualty introduces a different set of considerations. Pricing and modelling are more heavily actuarially driven, while asset management strategy, collateral requirements and the longer-tail nature of the liabilities are among the biggest trade-offs. Commutation terms, Champion said, are becoming particularly important in getting deals completed.
The arrival of private credit managers with different duration and return requirements has already helped support activity in casualty, while Champion expects the emergence of dedicated insurance investment strategies to become a far larger source of ILS capital.
If insurance increasingly develops into a stand-alone institutional investment strategy rather than a small allocation within a broader alternatives portfolio, Champion believes it could become one of the principal drivers of ILS inflows over the coming decade.
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