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Investor Guide to ILS: H1 2021

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Just a few months into 2021, the first natural-disaster headlines of the year are already occupying the minds of ILS insurance risk-takers. The snowstorms that brought freezing conditions to Texas will be a challenging event to evaluate for a number of reasons.

But it occurred to me that they may also be taken as an example of how some of the discipline of ESG investing could be brought to bear to the industry.

That’s because much of the loss of life and damages that occurred were not solely due to the record low temperatures in itself, but because ageing power grids could not handle demand, leading to prolonged outages.

In many cases it is difficult for insurers to know how to price for these kinds of risks as public infrastructure is generally not what they’re directly insuring. But if the industry could begin to agitate or price for known, particular infrastructural weaknesses – such as the New Orleans levees prior to Hurricane Katrina for example – then in theory, this could help drive more resilient development and investment in preventative measures.

There is clearly a growing wave of insurers that are now moving quickly to address ESG demands, even if initially with a lot of the focus on investing policies, leaving the next step as transposing these values to the underwriting side of their business.

Even so, that momentum is positive for the ILS market since they may initially be relying on exerting pressure on this client base to drive ESG outcomes for their portfolios.

Within the ILS industry, moving on from the initial tone of debate on how ILS is inherently ESG-friendly – as its business is in assisting with disaster response – the conversations in the industry are now much more practical and further advanced as managers start taking concrete steps to appeal to investors who are approaching their portfolio through that lens.

I must admit that when we discussed the idea of delving into what ESG investing might mean on a practical level within the ILS space, my preconceived idea was that more focus would be on the “E” of that triumvirate – finding the risk-transfer solutions that do the most for the environment, given that this is disaster risk we are dealing with, perhaps prioritising those covering under-insured perils such as flood or drought.

But what surprised me when we looked into it is the extent to which practical, less glamorous grunt work on the governance side is a key part of these strategies – it really is last but not least when it comes to the G of ESG. Here, tackling challenges from losses in past years has meant a lot of lessons have been learnt on all sides and more specific disclosures are now available to investors.

As for the societal side of ESG, this will come to the fore as workplaces start looking to rebuild post-Covid-19 office life – look out for more on this aspect in our next ILS Investor Guide.

To view the H1 2021 edition, click here.

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