16 December 2020 3 min read

Insurance Linked Securities, 2021, the hope of a return to better fortune [ILS News #3]

banniere ENTrust, the basis of a sound partnership, in a long-term industry

The difficulties our industry is facing with the Covid-19 crisis confirm that there is little correlation between Insurance Linked Securities and other asset classes. However, some special purpose vehicles will obviously be adversely impacted by the consequences. This will prompt investors to pay greater attention to the description of ceded risks.
It is the responsibility of the sponsors, the cedent, to ensure efficient management of this uncertain portion of losses whether incurred by Covid-19 or by the difficulties of forecasting and anticipating an explosion of costs such as those related to repairs and/or reconstruction in the wake of a natural disaster.


After several years of high claim costs that held captive a significant portion of collateral invested in the ILS market, it is only by applying this type of expertise that cedents will be able to restore trust in investors.


ILS market

Trust can also be forged through transparency. To this extent, it is important to play a pedagogical role with respect to risk so that all or a portion of collateral may be trapped. Ultimately, this brings us back to the fundamental concepts of underwriting. Among other criteria, underwriting takes into account the quality of the business relationship and recognizes the cedent’s teams for their capacity to underwrite a high quality portfolio, to manage its aggregates and to handle its claims. As we all know from experience, trust is difficult to obtain and very easy to lose.

One source of differentiation for sponsors consists of offering their investors a long-term partnership and avoiding the use of a short-term opportunistic approach based on the arbitration of different risk transfer mechanisms.

In fact, becoming involved in the cedent’s middle or long-term risk management strategy facilitates the task of aligning the investors’ interests with those of the sponsor. One should not forget that reinsurance is a long-term industry. Consequently, investors value the capacity of cedent’s to prevail consistently through the cycles.

In any event, the market continues to attract additional entrants as demonstrated by the successful launch of two newly-formed special purpose insurers; one by Fidelis and the other by Hamilton Re with its roll-out of the Ada Re platform. A hardening of the retrocession market at the time of the January 2021 renewals will bring opportunities. Under present market conditions, only sound partners and sponsors who follow truly disciplined underwriting practices will emerge relatively unscathed.


Strategy ILS

And what are your thoughts on Swiss Re’s acquisition of an asset management license and its launch of a new standalone fund company, “1863 Fund”? What are the reinsurer’s intentions behind these initiatives? Time will tell. However, one thing is certain. This strategic choice should mark a turning point for the ILS sector.



ILS must more effectively integrate Environmental, Social and Governance (ESG) criteria

One development the ILS market is currently undergoing, like many sectors, is the attribution of an ESG label for ILS transactions. A popular topic at the moment, it is interesting to consider what expectations investors have in this area. Naturally, it is not easy to deliver a product that is 100% compatible with ESG criteria.


ILS help make our society more resilient. They are intrinsically compatible with ESG criteria and this constitutes a sound base. However, when asked by their own clients about this issue, investors legitimately pressure our industry to act responsibly and formalize the accreditation process in a more tangible manner. It is true that more and more investors are appreciative of ESG labeling. ESG labeling is therefore becoming a strategic differentiating factor.





The process is often performed by means of a questionnaire aimed at determining whether the fund management company and/or sponsors provide coverage to arms dealers, the coal industry, mining or even tobacco companies... They seek to better understand the underlying covers as well as the ultimate beneficiaries of the ILS in which they intend to invest. We can only praise this initiative despite the additional time required to reach such a level of precision.

At this stage, a rating system is often used to assess the degree to which the product complies with ESG criteria.

Acting on the asset side is the easiest route at present. The investment policy for the pledged collateral is also a contributing factor. It is indeed more difficult, on the liability side, to guarantee that a palm oil producer will not ultimately benefit from the cover proposed by way of an ILS. However, all of this is a step in the right direction.

We may even go so far as to dream that, once these questions will have been properly addressed, investors will force sponsors to issue their risk transfer vehicles in “fair” tax jurisdictions. This will provide greater opportunity for the Paris marketplace.


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