‘No surprises’: What ILS needs to unlock new risks

As ILS capital looks towards new risk classes, the greatest challenge might not be finding opportunities but giving investors confidence the industry can understand, price and explain to them.

For Hanni Ali, chair of ILS Bermuda and CEO of Radix ILS, that credibility will be critical if capital is to move meaningfully beyond the property catastrophe risks where the market has built its deepest experience.

“The investors, the ultimate risk-bearers, need a credible path from identifying a risk, understanding how it’s priced, how it’s monitored and how the claims develop,” Ali told Bermuda:Re+ILS ahead of ILS Bermuda Convergence, held October 12-14.

Property catastrophe has an advantage in that respect. Decades of research, modelling and loss experience have created an established framework through which investors can assess risk and judge performance. “Billions and billions of dollars have been spent on research and models,” Ali said, pointing to the depth of research into weather perils. “Research into cyber is deep, but it’s not particularly long yet.”

Cyber has already attracted ILS capital, but Ali believes the market has yet to demonstrate how those structures will perform through significant losses. That experience will help determine how comfortable investors become with committing capital to the risk over the longer term.

Casualty presents a different problem. Losses can take five years or more to develop, delaying the point at which investors can judge whether the original assessment and pricing of the risk proved accurate.

For Ali, the underlying investor requirement is relatively straightforward: “What an ultimate risk-bearer investor ultimately is looking for is no surprises.” That does not mean losses cannot happen. Rather, it puts the emphasis on whether risks have been properly identified and communicated and whether loss development broadly reflects what investors were told they were assuming.

It also raises a broader question about how the industry approaches innovation. As ILS searches for ways to tackle new and increasingly complex risks, Ali cautioned against assuming the solution itself must become more complicated. “The perspective that a complex risk requires a complex solution; we need to move on from that and recognise sometimes a simple solution can address a complex risk.”

Instead, he suggested innovation should be judged by whether it improves understanding, execution and resilience, rather than simply introduce another structure or layer of complexity.

That could have implications well beyond product design. Greater transparency, better analytics, improved liquidity and faster movement of cash through the reinsurance system could all make the asset class easier for capital markets investors to understand and access.

The opportunity is substantial. Ali sees room for ILS to move into new perils, broader geographies and potentially intangible risks, while bringing additional capital to areas where protection remains limited.

But expansion cannot come at the expense of the qualities that established investor confidence in the first place, particularly as the wider reinsurance market softens.

Ultimately, Ali believes capital will follow new risks where the industry can demonstrate that the fundamentals are in place. “If the risks can be assessed, governed consistently and provide diversification, and that can be evidenced, capital will move to that risk if there is sufficient return.”

For a market looking for its next phase of growth, the message is that understanding risk might prove more meaningful in moving the needle than making ILS ‘more sophisticated’.

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