Did funds mislead investors?

Some insurance-linked securities (ILS) funds could find themselves in hot water because of how badly they miscalculated their losses in the aftermath of the 2017 catastrophes, John Warwick, managing director and partner, ILS Capital, told Monte Carlo Today.

The extent to which losses have increased since those initial loss estimates, caused by a mixture of the Florida legal system, demand surge and loss adjusters getting it wrong in the first place, has been a keen point of discussion in Monte Carlo this week.

But Warwick believes that some investors could feel they have been misled—and that could have consequences.

“The difference between the actual and reported losses was just too big in some instances to be a coincidence,” he said.

“There is always a creep on big cat losses of this type but in some cases it is by 30 to 40 points. They should have had a better handle on this in the first place.”

He added that ILS Capital initially came out with loss estimates much higher than most, but these have barely changed. “We have seen some deterioration, but nothing like some other funds,” he said.

Warwick said the issue some investors will have is that they reloaded based on these initial estimates—and the fact that rate increases were mooted by many funds. He believes this experience could make investors become more selective about which funds they are willing to work with.

“Some of these investors are so big that this is a small issue in the scheme of things, but there could be a flight to quality in the same way as you choose the best stock company to work with,” he said, adding that ILS Capital did not deploy any new capital for Florida in the last renewal, despite enquiries, because it felt the rate remained too low.

He added that it was odd that none of the new policies closed in January 2018 included so-called escalation clauses, whereby if the losses of the previous period increase, so does the premium retrospectively.