Divergence rather than convergence has been one of the themes of the ILS market since 2017, and this was echoed in many of the conversations at the recent ILS Week conference hosted by Trading Risk.
Unlike the quiet cat decade pre-Irma – when performance was more likely to cluster and the industry was more uniform – there has been a gulf between outperformers and stragglers in recent years, and a wider range of available strategies.
Speakers last week highlighted various ways this is showing up in the ILS market.
First, there is mixed appetite influencing the trajectory and shape of market growth.
Discussing the outlook for ILS capacity, our first panel of the week noted that, while last year's volatility made ILS assets’ low correlation more attractive, the disappointing returns amid cat losses over the last four years are making investors cautious.
Hudson Structured Capital Management managing principal Michael Millette forecast "flattish" capacity. "Some funds will raise, but there's a quiet bleed-out going on elsewhere," he said.
There are more marked preferences from capital to move towards low-risk deals – and specified peak perils – and "liquidity is a big focus for investors, too", added Vantage CFO Aurora Swithenbank.
This is shown, as I've previously written, in the current contrast between a voracious cat bond market and the more subdued mood music overall.
However, at least one of our speakers saw investors’ recency bias as providing opportunities as well as challenges, given the potential for over-corrections.
In contrast to this theme of divergence, there were points during the week where many discussions centred on the need for collaboration. Historically, the ILS community, given its relatively small size, has worked together well, and certain areas will benefit from this approach in the near future.
ESG is one area where a collective advantage can be gained from negotiating on evolving standards, as opposed to acting solo to gain first-mover advantage with investors.
Improving insulation from some of the challenges that have arisen in recent years – to keep from getting stuck in a whack-a-mole problem-solving mode – is another.
Apart from specific collateral-structure challenges, these are not just ILS issues but broader (re)insurance issues, such as understanding minor perils and aggregate risk or protecting against the next unforeseen loss after Covid-19.
"Everybody talks about black swans, but, as far as I can tell, some of these scenarios are like black crows – these scenarios are coming around all the time," Millette said on Monday's 'State of the market' panel.
Different solutions were put forward to this end: Swithenbank suggested more standardisation as cedants tweak the wording of exclusions, while Convex's Anne Middleton said buyers expected some tightening of terms but "not to the point where it comes less useful for cedants".
Millette agreed, saying underwriters had to price for the black swan/crow type of rare but costly disasters.
"I don't think it's a great game for the industry to try to win through exclusion."
Other solutions proposed were more use of mitigation measures, greater disclosure and quicker passage of information up the risk-transfer chain.
These goals serve more than one purpose – increased transparency and mitigation can be a tool to improve underwriting return but they can also help to meet ESG targets.
Indeed, if there is anything that can bridge some of the gaps in a diverging market, it will be collaboration.
