ILS: Deep roots on ‘The Rock’

There was a time when insurance-linked securities (ILS) were new and different, when they were regarded as being something that might enliven the market, but which wouldn’t stay the course—especially given the volatility of big losses and the irrationality of hard and soft markets.

Those attitudes are now in the minority, almost everyone at ILS Convergence 2018, organised by ILS Bermuda, agreed. ILS is here to stay, and Bermuda continues to have the lion’s share of the market. The fact that Bermuda is an important part of not just the ILS market, but the reinsurance world as a whole was also stressed right from the start of the conference.

Opening ILS Convergence, Kathleen Faries, head of Bermuda for Tokio Millennium Re, said that Bermuda’s old nickname of ‘The Rock’ was still just as relevant as it has ever been, as Bermuda continues to transform and evolve and be an important part of the reinsurance industry.

“The Rock may not look as it did 20 years ago,” she said, “and it may not look the same in 10 years from now, but it will still be standing here in the middle of the Atlantic, amid the shifting sands. The Rock is built on a foundation of innovation and collaboration between business, government and the regulators.”

According to Faries, Bermuda continues to evolve to meet the needs of the global reinsurance market, attracting innovators—such as investors in the ILS asset space and, increasingly, fintech players—to the Island and helping to create new business models.

She added that these innovators appreciate the benefits of doing business on the Island, and also can take confidence in doing business in a place that knows the advantages of having solid regulation and also a solid reputation.

“Bermuda is uniquely positioned to capitalise on new opportunities,” she said. “We have the reputation, the experience, the track record that will enable us to be a natural home for the coming transformation of the industry, especially where technology, analytics, human capital and hard capital come together.

“We’re proud of the progress the ILS sector has made and especially of Bermuda’s part in facilitating and supporting that sector of 
the market. When we had the first Convergence conference in 2013 the alternative capital market was about $30 billion, or about 15 percent of the total market. Now, just five years later, it’s 21 percent of the market and has forever changed the way we think about capital.”

Challenges on the horizon

Despite this progress there are challenges facing the market, including the question of “whether re/insurers want to be the Blockbuster of the market or the Netflix”, according to Anthony Rettino, founding principal and portfolio manager at Elementum Advisors.

Speaking at a panel discussion titled ‘Accessing Risk—Shortening the Value Chain’ at the conference on Bermuda, Rettino said: “We all remember Blockbuster—they had great distribution, great locations—and in 20 years they were obsolete.

“Then Netflix turned up and it survives because it provides value.” Rettino concluded that the challenge for industry was a simple one—did they want to be Blockbuster or Netflix?

According to Rettino, companies that enable more efficient data collection for underwriting and claims are going to have the broadest impact, but added that you can’t replace underwriting—only enable it by using artificial intelligence and more standardised data collection as well as more transparency and technology such as drones.

He added that there was a lot of angst in the insurance market at the moment as various companies consider their place in that market and what it will take to keep them there. In addition he said that there are going to be a lot of casualties along the way due to data strategies that are overly focused on cost and not value—hence the Blockbuster/Netflix comparison.

“There’s a lot of  mergers and acquisitions going on at the moment and managing general agents (MGAs) will see consolidation across insurers and brokers across the industry and other parts of the chain. You also see wholesale brokers buying MGAs. The world is obviously changing,” Rettino said.

The game-changer

Change was a word on many people’s lips at the conference. The internet of things is a game-changer for the insurance industry, according to Ben Rose, lead consultant & engagement leader at Aon Inpoint.

Speaking at a panel titled ‘Technology Shaping Industry’ at ILS Convergence, Rose said that according to one estimate an estimated 26 billion devices from fridges and kettles to computers will be connected to the internet by 2020, with customers paying an estimated $310 billion a year for them.

According to Rose, this is creating an internet of risks, which will impact a wide range of topics, such as security, health, utilities, mobility, government and business.

However, he stressed that insurance was still working out how to deal with this and that while some insurers had tried to look at it from a transactional basis, pricing things differently had not really worked so far.

Instead, he said, the internet of risks could enable better propositions with the right infrastructure and that risk transfer could be a differentiator.

Rose stressed that as more and more devices are connected, insurance itself will become faster as more information—including for example the time and place of an accident—is shared.

He added that, so far, only a relatively small number of insurers are pioneering their own solutions in this area of the market. Far too many others, he said, are either just observing the rise of technology or remaining entirely passive—and that this was creating an opportunity for other companies to enter the market, such as insurtech firms or new entrants.

The increased use of technology was also mentioned by veteran technology journalist Kara Swisher, who gave the keynote address at the end of the first day of the conference. She pointed out that the use of technology to create self-driving cars is becoming unstoppable and that society—and by implication the re/insurance industry—will have to cope.

She also stressed that sensors are appearing on more retail products, creating a retail-on-demand market that will be very different from what is regarded as the norm at the moment. In her words: “Strap in, it’s going to be a bumpy decade.”

Cooperation and convergence

The future of Bermuda in the market was another topic of discussion at the conference.

Bermuda’s Premier David Burt stressed that it’s vitally important for the future of the Island that businesses work with the government and the regulators to keep the Island at the forefront of the industry.

Speaking in a fireside chat moderated by TMR’s Faries, and with the participation of Sean Moran, CEO of the Bermuda Business Development Agency, the Premier said that it was vital for Bermuda to keep its reputational excellence, which is based on a combination of innovation, the use of fintech and other technologies and regulatory forward thinking.

Burt, who has been attending ILS Convergence since its inception in 2013, said that the government of Bermuda was sometimes accused of not reaching out enough to business, something that he said was untrue, as the government makes a point of consulting with business to assess what it’s most concerned about.

Burt added that the government, regulators and the industry are all working together to benefit Bermuda and also protect its reputation and that it was important to recognise the challenges ahead and meet them.

Burt said that the government has a vision for Bermuda, that it wants the Island to be known as a place for innovation. He cited fintech as one example of this, stressing that Bermuda can be a great test bed for fintech companies which can come in and develop their products/services.

Moran added that Bermuda has reached a natural stage in its maturity and that it has proven itself by having survived events like the hurricanes Harvey, Irma and Maria of 2017. “I’m not being complacent about this,” he said, “but I’ve never been more confident of where we are in the business sector in the four decades that I’ve been here.”

Despite this confidence others at the conference stressed that Bermuda must keep moving forward as much as possible. At the ‘Technology Shaping Industry’ panel, Sean Bourgeois, the founder and chief executive officer of Tremor Technologies, said that if the ILS market was going to make the very most out of technology in the future it needed to be as open as possible to talent, and that there was a real problem of the lack of women in the market.

He stressed that the market needed to recruit from all who understand technology and how re/insurance can use it, not just from one part of the recruitment pool.

Bror Muller, moderator of the panel and vice president of business change at TMR, pointed out that Bermuda possesses an advantage that many other re/insurance markets do not—because it is relatively small it can change more easily than others can, giving it a nimbleness that it can benefit from if it chooses to lead the search for talent.

Future growth

In the penultimate panel session of the conference John Seo, co-founder and managing director of Fermat Capital Management, expounded on what it would take to grow the global ILS market from its current estimated size of between $80 and $100 billion to $300 billion.

Seo said that this growth was not a big deal, as there are a number of ways it can get to the target total; he detailed a number of different routes that ILS can take in the future.

According to Seo, the ILS market can do it through natural growth, for example by penetrating further into protection gaps. He added that there is tremendous room for expansion outside the US, pointing out China in particular as one area of possible growth. Seo also said that other areas of possible growth include non-natural catastrophe lines such as cyber and casualty.

Seo made the point that in 1998 the ILS market was made up solely of catastrophe bonds and was around $1 billion in size. By 2008 the market had grown to roughly $20 billion as collateralised reinsurance emerged, showing 20 times growth. A decade on to the present day he said that the ILS market is now at least $100 billion in size—with room for a lot more growth.

Another member of the panel, Mike Millette, managing partner at Hudson Structured Capital Management, also highlighted the protection gap as a vector of possible future growth opportunities. He mentioned two coverages in particular that could see future growth, namely Californian wildfire and US flood.

Millette said that there will be growth in existing areas of the ILS market, predicting that Florida will possibly double in value over the next 10 years. According to Millette, there is currently around $100 billion of reinsurance placed in and around Florida which could potentially become $200 billion, and that as a result the capital market will have its share of that business. He also highlighted the Chinese cities of Xinjiang and Guangdong as having the potential to become the new Florida of the future reinsurance market as insurance penetration increases in the country.

Millette cautioned that the ILS market should not be too narrowly focused on the catastrophe risks in which it already holds a significant market share, instead setting its sights on other areas where capital markets investors can back insurance risks and earn a reasonable return.

On a more cautious note Lixin Zeng, CEO of AlphaCat Managers, said he didn’t feel that the market needed to change significantly to reach the level of $300 billion, as he sees plenty of growth potential business at the moment.

According to Zeng, making coverage less expensive will be one key area, along with the application of more efficient ILS capital to areas where protection gaps exist, thus helping insurance penetration to expand.