Investor Guide to ILS: H1 2022
I started writing about the cat reinsurance market in 2010 and for many years the stories my then editor recounted about covering hurricane season seemed like an old-time legend.
As far as I knew, hurricanes were not much more than a weather pattern on NOAA’s website, storms that stayed far out in the ocean or curved away from the American coastline.
Of course, by 2017 I was getting a crash course in how to cover live hurricane events and a glimpse of the “factory line” of storm production that can set in under the right conditions.
In the years that followed, we also saw a different mix of so-called secondary perils, wildfires and storms, alongside the major hurricanes of Harvey, Irma and Maria in 2017.
But while this flip-flop from a generally benign catastrophe phase to a more active one made me much more conscious of the power of disaster losses, having experienced that early phase also reminds me that there is no “new normal” in ILS and a short-term view on the market will always be skewed.
That’s partly why a comment from one of the consultants quoted in our “ask the advisers” feature on p18 resonated with me. Investors puzzling over what kind of ILS perils they want to invest in should be wary of losing the woods for the trees, he warned – because ultimately there is model uncertainty in all insurance risk.
Secondary perils should be quantified and managed, of course – but a freak winter storm or flood loss does not change the fundamentals of the game.
However, even if you are taking a longer-term view – looking at the past decade’s track record instead of the past five years – this doesn’t mean you are letting the industry off the hook from considering pricing issues for certain kinds of cat risk.
As we released this latest edition of the ILS Investor Guide, London insurance marketplace Lloyd’s had announced a fresh focus on managing volatile risk across all business lines.
It pointed out that exposure growth, rather than climate change, is much more likely to be the real culprit of cat loss experience outrunning budgetary expectations in the past five years. Lloyd’s syndicates should expect to be closely held to account on whether they are setting realistic cat loss budgets, its supervisory team announced.
When an organisation like Lloyd’s starts to put increased supervisory focus on a certain issue, you know that this will help catalyse a further reaction across the (re)insurance market – as has been the case in US excess-lines insurance in recent years, for example.
As it coincides with other reinsurers and ILS funds running their ruler over cat pricing assumptions, the underlying market should continue to correct and deliver a better experience for investors.
To view the H1 2022 edition, click here.