With Milton looming, ILS sector meets to take longer view

Bermuda’s insurance-linked securities sector is thriving, and this week’s Convergence conference should help participants to learn about new solutions and ways that third party capital can be used to solve challenges for the risk transfer industry. 

The conference also features a major commitment to examining how science, risk and capital converge to find new solutions to problems, not only with regard to climate, but to a broader range of risks as well. 

That’s the view of Jon Stanton, the president of ILS Bermuda, organisers of the annual conference, which opened last night and runs through Wednesday. 

Interviewed yesterday as Hurricane Milton was gathering strength in the Gulf of Mexico, Stanton said the hurricane, which is expected to make landfall in Florida on Wednesday, would focus minds.  

 Asked about challenges and opportunities facing the sector, she said: “Obviously, today our thoughts are dominated by Milton heading over the super-heated waters of the Gulf of Mexico towards the west coast of Florida.  

“It is taking an unusual track and there is a lot of variability in the predictions for intensity, but it is looking like it could have a devastating impact, particularly in the Tampa area,” she said. “How much this will affect the industry both in terms of cost and opportunity, remains to be seen. 

“At the conference this week, we are looking at the relationship between short-term events such as Helene and Milton, and the long-term impacts of climate change.  

"The ILS market needs to adapt to potential higher exposure and volatility. Investors may be more cautious about risks associated with climate change and the impact of global warming. 

“This year’s sessions will focus on the science and business innovation to help strengthen modelling and provide more robust tools to manage risk exposure. “

Stanton noted that the conference would also be looking at the challenges of economic uncertainty – factors such as inflation, interest rate changes, geopolitical events – and how they potentially affect both returns and investor appetite.

She noted that the sector was in a strong position, with between $105 billion and $110 billion in dedicated ILS capital expected to be in place by the end of the year. Much of that capital is generated through Bermuda, and virtually all of it is listed on the Bermuda Stock Exchange. 

Stanton said the conference would look at the connection between catastrophe risk and climate change, but noted that it was also important to look more broadly at risk as well. 

“Investors are cautious about risks associated with climate change and the potential for increasing number and severity of events, and we want to try and make sure that people understand the difference between an individual event like Milton and the much longer-term question of climate change,” she said. “That's a challenge for the industry as a whole, to make sure that there's a good understanding that risk management is a much bigger picture than just what's happening on a climate level.”

It was also important for the sector to recognise that despite the importance of climate, it was not the only risk that needed ot be modelled.   

Stanton said the sector had the opportunity to grasp many opportunities as it continued to move into more lines of re/insurance.  

“Investors are showing more interest in diverse lines of business, including emerging risks like cyber and terrorism, creating a broader scope for ILS expansion,” she said. “Bermuda also stands to benefit from the increasing demand for ILS products, particularly in non-correlated specialty risks.”  

She added: “We are also seeing a growth in parametric covers in both traditional and non-traditional lines.”  

Stanton said the industry should never lose sight of the fact that it was in the business of providing protection to people and property at risk. 

“The insurance and reinsurance markets and ILS solutions are an essential part of providing protection for people when catastrophic events happen – as illustrated recently by Hurricane Helene,” she said. “Loss estimates as of today, excluding the FEMA flood programme, are between $6bn and $11bn of privately insured losses. 

“The reinsurance and ILS market in Bermuda is critical in providing this protection. The ILS market provides a mechanism for getting cover where it is needed in a capital efficient manner that provides an attractive return for investors.”

Stanton also paid credit to the sector’s regulator, the Bermuda Monetary Authority, saying it takes a proactive stance on the regulatory environment, and works well with industry participants and organisations like ILS Bermuda to make sure that the market is well regulated but responsive. 

“We think that's a big part of helping Bermuda to dominate the risk transfer market,” she said.  

She said the conference would also look at the growing diversity of risks that are covered, which includes cyber, terrorism, and casualty, “reflecting our ability to adapt to the increasingly interconnected global risk environment”. 

She added: “This trend is driven by investor demand for non-correlated risks and the desire for portfolio diversification. 

“The market’s ongoing evolution into broader lines of business ensures its relevance in the face of modern challenges and helps mitigate potential volatility caused by natural catastrophes alone.”

She noted that the growth of third party in capital, where risks tended to have a longer tail than in catastrophe bonds, was driven by investors with a longer term horizon. 

“They're looking for people who want to make a longer-term commitment and are looking for high frequency, low severity type risk where they are not going to have the big fluctuations that you potentially can get in natural catastrophe risk. 

“I think it's a matter of just structuring the products right and finding the right people.”

On the role of science in the conference, Stanton said: “The emphasis on the convergence between risk, science, and climate change is crucial in light of the potential increasing frequency and intensity of climate-related events. 

“Over time, climate change poses a significant threat to global economies,” she said. “By integrating scientific data and climate models into risk modelling and risk transfer strategies, the ILS market can better anticipate and mitigate these risks, thereby increasing resilience.

“Focusing on this convergence now ensures that the ILS sector remains proactive in addressing climate risks and creating opportunities for business innovation with the scientific research space. 

"By adapting to the evolving landscape, the sector can continue to provide valuable solutions for climate adaptation and resilience.”

Stanton added that she was thrilled that keynote speaker Kerry Emanuel, a leading climate scientist from the Massachusetts Institute of Technology (MIT), would be attending along with other  luminaries risk modelling pioneer Karen Clark and behavioural  science specialist Paul Craven.  

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