Full steam ahead for ILS

The ILS sector has responded to the cat losses of 2017 and is now well positioned to develop from strength to strength, Justin Wallen, head of ILS, Guernsey, Artex Risk Solutions, tells Monte Carlo Today.

What has been your experience of the market in the past 12 months?

Our experience is consistent with the overall growth in terms of increases in the number of transactions that Artex facilitates and our assets under management in both Bermuda and Guernsey. It’s no secret that some of the insurance-linked securities (ILS) funds have collateral trapped on a certain number of their 2017 transactions but it was very impressive how they were able to reload with new capital for backup covers and the January 1 renewals to offer that continuity of coverage and increase coverage where required.

What trends are you seeing?

Artex saw plenty of new collateral from the ILS funds we work with who were looking for and were able to achieve an uplift in expected return for investors following the 2017 losses.

Some of that additional capital might be short-term in nature by trying to capitalise on market conditions following the losses, but overall the ILS market continues to grow and seems able to fully deploy the new capital as it comes through.

Perhaps one area where collateralised reinsurance transactions as a whole could improve is in the more timely reporting of required collateral calculations for the 2017 losses and the subsequent scheduled release of any excess collateral. In our view that process is not as slick as it should be, so we are considering how to adjust the contractual language in 2019 with a view to improving the timeliness of the collateral calculation reporting.

What breakthroughs have taken place recently?

The Artex Bermuda office was able to facilitate a rated reinsurance vehicle for one of our ILS clients; it offers an alternative product to collateralised reinsurance. We see the two main advantages as (i) access to potential markets that previously have shied away from the administrative burden of collateralised reinsurance; and (ii) being able to reduce collateralisation and fronting fee expenses.

The ability to more easily provide coverage for risks with a reinstatement is of obvious interest. We expect other ILS fund managers to implement similar rated reinsurance structures given the compelling advantages this structure seems to offer.

How will ILS in Bermuda/Guernsey be affected by new UK legislation?

From what we have seen at Artex and our observations of our competitors in this space, we think the ILS sector in both domiciles is in excellent health. We continue to put in place structures and transactions that our clients are happy with in the same manner and with the same efficiencies we have consistently been able to provide over the years.

Anything that makes ILS more mainstream is certainly a good thing for the sector. Time will tell whether the UK can facilitate transactions as quickly and competitively as is currently the case offshore.

How did the markets react to the cat losses of 2017?

The ILS market was pretty impressive in how nimbly it reacted to the 2017 cat losses in that those losses seemed to be in line with modelled expectations and so weren’t a shock to their investors, but also there were plenty of investors out there ready, willing and able to deploy new capital at short notice and take advantage of any opportunities that arose from those losses.
Clearly these investors are highly sophisticated and, it would appear, happy to continue deploying their capital in this sector as a non-correlated asset class.

Is this now a mainstream product for many insurers and reinsurers?

It definitely seems that way for property cat business—we see it as being less alternative and more mainstream and the events of the past 12 months have only reinforced that view given the amount of capital in this sector and its continued growth in terms of its proportion of the overall reinsurance market.

Artex-managed vehicles are already contracting with in excess of 200 separate counterparties benefiting from the capacity we are able to offer via our structures, which certainly adds weight to that argument.

Justin Wallen is head of ILS, Guernsey, at Artex Risk Solutions. He can be contacted at: justin.wallen@artexrisk.gg