For the ILS market, perhaps more than any other, the outcome of this year’s high inflation is still to be determined. Unlike other industries that are suffering increased immediate costs, this sector’s performance – as always – is ultimately driven by events no one can foresee.
Obviously, some level of routine catastrophe losses will arise over the coming year. They may prove to be more expensive than anticipated due to global supply chain disruptions and the high costs of rebuilding.
But the key influence on the market remains the risk of a major loss. Should the industry ride out this phase of turbulent inflation, without a repeat of a Hurricane Ida-type event, then much of the current fear around inflation may remain theoretical for ILS investors.
However, that’s not to say ILS managers aren’t hugely aware of the need to deliver on managing and pricing risk accurately in this fast-changing environment. Insurance as a sector has historically struggled to deliver on data-processing improvements and digitisation of processes.
This kind of environment will test the value of the investments that every company in the value chain, from insurer to reinsurer or ILS platform, has made in data analysis.
Meanwhile, the potential gain for the asset class from this environment offers a more optimistic lens on the situation.
ILS ranks among the group of inflation-linked asset classes that offer investors a defence against rising rates. This is due to yields being connected to short-term money market rates – reducing mark-to-market variation and boosting yields as central bankers push up rates.
Some institutions are already beginning to score the sector more highly as an overweight target in response to the current environment.
However, it remains to be seen how this lure operates among the investor base in the months to come. At mid-year, year-to-date allocations were only slightly up as a whole.
But when global headlines seem to get gloomier and gloomier, the dual-edged influence of inflation on the sector at least offers some room to manoeuvre to optimistic advantage.
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