Storm losses could accelerate ILS growth
The recent hurricane losses in the US could help accelerate growth in the insurance-linked securities (ILS) sector—but spreads may not widen as much as investors hope.
That is what Nelson Seo, managing director of investment manager Fermat Capital Management, one of the oldest ILS fund managers in the world, told PCI Today, speaking ahead of the conference at which the reaction of the third party investors to recent catastrophe losses will likely be a big talking point.
Seo says the storms have triggered more interest in the ILS space from investors who foresaw an opportunity to benefit from better spreads in the aftermath of losses.
He stresses it is too early to tell how spreads will react but this dynamic could nevertheless help growth the market overall.
“It has caused a lot more interest in ILS and no-one is exiting the space. These events may not turn out to be as big as some estimates suggest and few cat bonds will be affected so I am not sure there will be a big correction in the market, but it has generated interest.
“On that basis, I feel the main result of these cats will be a market growth effect as opposed to spreads blowing out. Interest in ILS was building anyway but this could help grow the market even more.”
Commenting on the wide variation between loss estimates from the risk modelling agencies, Seo adds that investors who understand the challenges of post-event loss estimates will not be perturbed by this.
“It is very difficult for the modellers post-event. The probable maximum loss set in advance is more important, and we feel those are accurate. The problem is that each storm has so many nuances in terms of its speed and direction of travel that it is very difficult for a model to pick all that up.
“Irma, for example, made landfall as a category 4 but its wind speeds died very fast afterwards. Once you understand these nuances as a user of the models, it is less of a concern,” he said.
Seo added that while he expects growth in ILS to be across the board, there could be a spike in interest from buyers in aggregate deals, which are triggered based on a combination of events.
“The traditional markets have never loved aggregate deals but the ILS markets will do them. They could become even more popular now,” he said.
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