Lack of risk models limits cedants’ ILS options in Europe

A lack of risk models covering some key perils in large parts of Europe is holding back the development of the insurance-linked securities (ILS) market in the continent, Marco Sordoni, head of reinsurance buying for Italian insurer UnipolSai Assicurazioni, told Monte Carlo Today.

Sordoni said that the lack of a wider range of risk models covering multiple perils is preventing cedants accessing ILS sources of capacity. He believes such models would be enthusiastically received by insurers in the region keen to access a new form of capacity.

“There is a model for earthquake in Italy but not for flood or wind. That means my options are limited,” he explained.

“I don’t understand why the modelling companies are not developing models covering more perils in the region—not just in Italy but in many European countries.

“ILS investors want to expand their remit, but they are reticent to take on risk without such a model in place.”

UnipolSai has experienced this first-hand. It tapped the ILS markets to complement its traditional reinsurance programme on two occasions: it was the first issuer to secure coverage for Italian earthquake risk using ILS, via the €200 million Azzurro Re three-year bond issued in 2015, which was well received by investors.

It then completed a smaller €45 million bond in February 2019 covering atmospheric perils including snow pressure and flood in Italy.

That deal was innovative in that it succeeded in moving these ‘unmodelled’ risks into the capital markets using a bespoke model developed by Willis Towers Watson.

But ILS investors had reservations. The deal was halved in size from its original offering and only the more remote risk issued as an ILS; the riskier part of the deal was instead placed with reinsurers.

“Traditional reinsurers will work from historical data and form an opinion on a risk; ILS investors will not,” Sordoni said.

“They are very reluctant to go in that direction and, when you consider how some were hit by what was previously considered a marginal risk—wildfires—you can see why. But that is why the risk modelling companies have work to do in Europe.”

Sordoni has not ruled out doing a third ILS deal this year to complement its traditional placement on the pure cat side, but he said it is too soon to determine that. The decision will depend on a combination of reinsurers’ and ILS investors’ appetite in this renewal, and the dynamics around potential rate increases.

He will also explore the option of buying more coverage. The insurer bought some €1.8 billion of property-catastrophe reinsurance coverage last year, an increase of around €200 million on the year before because of the expiry of its Azzurro Re cat bond.

This year, it may seek to increase the placement by another €100 million again, Sordoni said.

“We may look at that, but we are waiting on the final data to see the exact calculations. It will be the same structure with perhaps an increase,” he said.

UnipolSai works with a panel of 18 reinsurers at present, after adding one last year. This is a big reduction on the 40 it worked with a few years ago, after Sordoni restructured the company’s reinsurance programme.

This process was accelerated when, in collaboration with Willis Re, the insurer launched Multipol, a multiline aggregate excess-of-loss programme, which requires every reinsurer to work with the insurer on all its lines of business globally.

Sordoni said there is a possibility it will increase the panel again this year, but only by one player.

“We prefer to have long-term sustainable relationships, so the maximum we would increase the panel by is one,” he said.

He is prepared for discussions around rate increases in this renewal, although he stressed that these should not be across the board.

“UnipolSai’s motor business is performing well. We anticipate upward pressure on the property-cat side after several years of reductions, but we also believe that any such negotiation should take into account the performance of individual cedants,”