The next steps for ILS: pricing and capacity dominate discussions

In June, insurance-linked securities (ILS) manager  Schroder Secquaero, previously just  Secquaero Advisors, rebranded again. It is now  Schroders Capital and is under the leadership of Stephan Ruoff as global head of ILS. He took over the job from  Secquaero founder Dirk Lohmann in September 2020.

As Ruoff told Intelligent Insurer  during an interview on the Re/insurance Lounge, the online, on-demand hub for discussion and debate, the name change reflects Schroder’s gradual incorporation into the wider Schroders business.

The new branding combines ILS with private asset capabilities such as real estate, private equity and sustainable investment.

As Ruoff explained, the business is, therefore, now part of a wider private asset conglomerate with $65 billion of assets under its management last year. He and his team, though, remain solely focused on ILS and he is centred on much the same issues occupying many others this Monte Carlo season.

“The topics we’re going to discuss with capacity providers as well as with ceding companies are not very different from those for the larger reinsurance or insurance industry,” he said.

“We’ll need to look at it sector by sector, line by line and geography by geography.” Stephan Ruoff, Schroders Capital

Moving up

Prime among those issues is the rising catastrophe activity: The industry has seen the year start with winter storm Uri in the US, summer flooding in Europe, a very active wildfire season and, most recently, Hurricane Ida.

“All of that is to say that we have another year—the fifth consecutive year—of very heavy loss activity,” said Ruoff. This will put a focus on pricing generally, but also pricing and modelling questions around secondary perils such as floods.

How those discussions play out will vary.

“I don’t think there will be one pricing. We’ll need to look at it sector by sector, line by line and geography by geography,” he said. In many areas, though, prices are heading up.

For some, the experience will be familiar. In the US, the recent years’ drive to higher pricing is likely to continue. “We’ve seen it already in the past few years, varying in different areas, but it’s been a consistent increase in reinsurance or risk-transfer pricing.”

In Europe the moves are more recent. “Only recently have we started to see pricing react, partially driven by COVID 19, but now the flood events throughout Europe will contribute as well.”

In many cases, those discussions still won’t take place in person. Given how the industry has managed—now completing a second Monte Carlo Rendez-Vous remotely, it would be difficult to argue that it can’t cope. However, if it persists, over time, that lack of contact could cause problems, Ruoff warned.

“The industry has a relatively stable network with known actors and players, so that will sustain itself for a given period,” he said. “However, should that change, then it becomes more tricky if you have to establish new relationships or you enter into new business contracts.”

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Long COVID

Pricing will reflect not just losses but also capacity, which should hold back some of the increases. The increase in cat bonds, particularly, has been striking over the past year, according to Ruoff.

“That space has seen not only a lot of issuances and record volumes coming to the market but also inflows in terms of assets under management for us as managers, with a lot of demand from investors for cat bonds,” he said. That’s led to some spread tightening of cat bonds, with prices coming down a bit, he added.

“The bigger question is whether that’s a precursor to a softer market globally speaking or not, because at the same time, we’ve seen on the private transaction side that collateralised reinsurance but also traditional reinsurance prices have increased. That means the spread between cat bond pricing and private transactions has widened over time.”

That means investors must consider whether it’s more attractive now to invest in new companies, into collateralised reinsurance, to stick with cat bonds, or add capacity to investment in ILS overall.

For the new companies there’s going to be a need for discipline, Ruoff said.

“They’ve entered a market when it’s attractive, but from our perspective, these companies cannot expect any underwriting returns, and they don’t have reserve redundancies,” Ruoff explained.

“If they want to survive and be successful, their focus has to be on underwriting profit solely; otherwise, they will not survive for long.”

Beyond bonds

The need for discipline is perhaps a wider lesson for the industry, too. As Ruoff said, the repercussions of COVID-19 have already seen a reconsideration of the value of wordings—“a very worthwhile exercise”. But the lessons to be drawn from it are probably not over. Further repercussions are probably still to emerge.

“We still see reported losses increasing; and balance sheets absorbing losses reported. We still have arbitrations out in the market, and legal proceedings out in the market. I would say we will live with some of the uncertainty for a longer period.”

For ILS investors who usually value instruments at a single point in time, that’s a challenge. “It’s obviously very difficult not knowing what the eventual outcome will be,” he said.

But it will, perhaps, separate the wheat from the chaff, he said.

Schroders wants to distinguish itself in another way: through innovation. Secquaero founder Dirk Lohmann placed the first cat bond—Hannover Re’s Kover bond—back in 1994, and the business is constantly looking to expand the ILS universe, said Ruoff.

It wants to offer investors opportunities to invest in closed-ended structures, through financing structures, through Lloyd’s, in run-off vehicles or in the life financing arena through acquisition of portfolios.

“There’s a range of investment opportunities that goes far beyond the traditional ILS view that we have developed so far. That’s what we want to explore further,” he concluded.

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