ILS diversification needed for growth: panel

ILS diversification needed for growth: panel

The ILS market should expand beyond catastrophe risks to keep drawing in investors and expanding, suggested panellists at Trading Risk’s New York conference held earlier this month.

Axa XL’s head of alternative capital Daniel Brookman said diversification of risk could draw in new investors.

“Most of the money in the world is low-risk, low-return-focused,” he noted.

“To open up those deeper pockets you have to find longer duration, lower risk, lower return, highly diversified opportunities and… the broader insurance market can offer that.”

It is key for ILS to move beyond property cat if it is to grow further, agreed Jeff Sangster, partner and CFO at Hudson Structured Capital Management.

“If we don’t move forward we are going to stall,” he asserted.

Cyber risk is one area that ILS capital could lend itself to, said Aaron Koch, ILS director at Milliman.

However, he added that the 2017 and 2018 catastrophe events had raised some concerns about modelling in the space.

As a result, some end-investors felt more effort should be focused on understanding current exposures before broadening out into new areas.

Cyber risk could be difficult to quantify, Sangster noted.

“The next Katrina or 9/11 is going to be a cyber event and it could shut down the world – that is the biggest risk.”

Given the scale of a potential event, more established risks make more sense for ILS investors, he suggested.

The run-off space is another area of opportunity for the ILS space, as a cedant not just an investor, added Jarad Madea, co-CEO of TigerRisk Capital Markets & Advisory.

“It [the run-off space] is a potential solution to taking care of the trapped collateral.”

Commenting on recent M&A activity, Madea said it is access to risk that has primarily driven deals for ILS managers which have sold to (re)insurers.

“Independent asset managers needed help getting more access to risk in a way to grow the business," he explained, adding that (re)insurers in turn needed help growing their assets under management.

Sangster agreed that finding growth had been a struggle for ILS funds in the past.

Despite the need to access risk, Sangster was not convinced that ILS managers looking similar to (re)insurers was the correct solution.

“You see ILS investors setting up their own balance sheets but they are not at the right size – there is an opportunity, but it is limited.”

The panellists agreed that scale mattered when it came to ILS providers increasing their asset base.

“If you look at the reload of 2017, the capital went to existing players and existing relationships. Scale does seem to matter,” Koch said.

You need to have a certain scale just to make the models work,” Sangster concluded.

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