ILS must face up to challenges around secondary perils and trapped capital: Convergence 2020

08-10-2020

Panelists on the ILS Manager Panel at Convergence 2020, titled: ILS at an Inflection Point, agreed with the sentiment implied in the title of the session.

ILS has not fully emerged from a rough patch it has endured since 2017, said Amit Patel, senior vice president of quantitative and insurance strategies at Aksia, who chaired the session. 

Paul Barker, partner and portfolio manager at Elementum, noted losses from secondary perils have been a huge issue for ILS. According to Aon statistics, he said, 60 percent of ILS losses have come from secondary perils in 2020, while secondary perils have driven the majority of losses for ILS in eight of the last ten years. 

“It is important you don’t take vendor models at face value,” he said, advising managers to think about the factors the models do not take into account. 

However, panelists distanced themselves from controversial statements made earlier in the conference arguing climate models were now obsolete. “Models are not the be-all-and-end-all but they are not obsolete, they are the baseline from which you work,” said Andrew Hughes, managing principal and Hiscox partner at Hiscox ILS. 

Hughes said ILS managers must reconcile the challenges of being both fiduciary asset managers and reinsurers. Managers have a responsibility to do the best they can for their investors, while accepting they are a small part of the reinsurance market, with relatively limited influence over it, he said. 

Quoting the Rolling Stones, he said: “You can't always get what you want, but if you try sometime you find you get what you need.” 

Barker agreed that ILS is a small part of the reinsurance market but said it could still exert some influence, citing Elementum’s own work pushing for environmental, social and governance disclosures. “We drive change in the market and punch above our weight,” he said. 

Turning to the trapped capital issue, panelists cited industry efforts to resolve the problem, with banks stepping in to offer credit lines to ensure capital availability and distressed debt hedge funds also looking to get involved. Another manager has securitised trapped capital

However, Dominik Hagedorn, co-founder, chief executive officer and head of investor relations at Tangency Capital, warned these solutions may come at a price. Distressed hedge funds may not be willing to offer liquidity on the terms ILS managers want it, while the cost of capital with a bank may not be attractive. 

While these solutions do offer options for ILS, it is not clear whether these decisions should be approved by investors, or whether managers could make these decisions on behalf of investors, added Hughes. 

ILS Bermuda, Convergence 2020, Paul Barker, Elementum, Andrew Hughes, Hiscox ILS, Dominik Hagedorn, Tangency Capital, Amit Patel, Aksia

Bermuda Re