Hardening market creates significant investor opportunities: ILS Capital Management

Factors such as the California wildfires and the current active storm season mean that significant rate increases are on the cards and this creates opportunities for investors, John Warwick, managing director and partner of ILS Capital Management, told Intelligent Insurer.

“Generally, we can see there is going to be a decent rate increase on the property side,” Warwick said.

“We’re looking at between 15 and 20 percent increases on cat and retro. The fact that the market is hardening is an opportunity to write business with a decent investor return.”

He added that COVID-19 has created a need to tighten up wordings on policies and has amplified the issue of trapped collateral. In the light of the current issues the industry faces around business interruption claims relating to COVID-19, he predicts a return to more precise policy wordings.

“It’s certainly raised wording issues on the original business,” he said.

“Some of the wordings were so loose that courts might well go with the plaintiffs. I’m old enough to remember when each peril on a policy was rated separately and the wordings were very tight for each section.

“We’re going to have to go back and make sure that if we are going to cover something, we get the right premium for it.

“We won’t know what the true COVID-19 situation is until the courts have had their say. There are some jurisdictions where COVID-19 is definitely covered, and others where it’s a very grey area and then there’s the matter of the reinsurance wording, and hours clauses,” he explains.

Getting money back
Warwick also expects difficult conversations in the insurance-linked securities (ILS) sector around trapped collateral, with disproportionately large amounts of money becoming trapped.

“It’s grossly unfair,” he said. “We have just closed a deal to release an amount of trapped capital. That deal has nearly three years in the making it’s a way of getting back our money that has been unfairly held.

“Going forward, we will always want to see the track record on trapping before committing to contracts. Then it will be a matter of sensible retention levels and sensible wordings to make sure spurious claims don’t come out of the woodwork.

“It’s essential to make sure we know exactly what we are covering and exclude everything we are not going to cover,” he said.

Looking ahead, ILS Capital Management now has its balance sheet rated in order to access more opportunities and greater flexibility in what it can offer. It is also investing money in three insurance companies in the US.

“We will continue to look for other opportunities to keep a balanced book, but in areas where we can have influence over profitability and over the pricing of the business and control all the associated expenses,” he concluded.