Rebounding after trials

After some recent challenges, the ILS market remains strong with exciting growth prospects. Cyber and further social development transactions are on the agenda, as Paul Schultz of Aon Securities told Monte Carlo Today.

Following the losses in 2017/18, has ILS rebounded strongly?

It has been more nuanced than that. If you look at 2019 to date, the level of activity has been somewhat muted and that is in response to the losses of 2017 and 2018. The capital providers have been more cautious. But it does feel as if the tide has turned now and there is more wind in the market’s sails; the pipeline is building, we expect Q4 to be something of a rebound quarter and there to be an active 2020.

That outlook is based on a lighter year for cat losses. In the absence of further heavy losses we anticipate a profitable year for investors, more investors looking at the space and others increasing their allocation.

Further catastrophe losses could change things, but equally it would be unlikely to mean a long-term change for the market. In that scenario, everyone will examine their risk profile, rates might increase, and you could see investors on the sidelines enter the market at the top of the cycle. Either way, capital will come in.

Has investors’ view of the asset class changed?

The majority of investors remained in the space, but they have taken some time to ask questions and re-educate themselves. They have been asking a lot of questions about climate change and how that might be affecting loss activity. They are also asking about the quality of the risk models used and maybe starting to understand that they need to be viewed as just part of the picture, and not the only source of information.

Investors are still very interested in this asset class, in part because of its non-correlated nature to other returns, but they also want to see a year with fewer losses before they commit any further to this space.

Are we seeing expansion of alternative capital into new lines/geographies?

Yes, that is happening in a number of ways. We are seeing governments increasingly de-risking and that is bringing new risks from new geographies to the table. Organisations such as the World Bank and government agencies are starting to come to us.

This works both ways, as the capital ILS can offer is making these countries more resilient and better able to manage catastrophe losses. We expect to see more of this. We are also starting to see new risks come to the market. Cyber will come to ILS at some point and various other risks will start using parametric solutions.

Are you happy with the performance of the World Bank catastrophe bond?

It was a large, landmark deal at $1.4 billion and covered four countries: Colombia, Peru, Chile and Mexico. The fact that it was triggered in Peru with a recovery of $60 million could be seen as justifying how well this market can work. This money can be an excellent way to help countries rebuild quickly and the deal could bring others to the market.

There has been speculation that charities such as the Red Cross could come to market, and seeing deals like this one work so well can only help the business case for that.

Do you see the World Bank transaction as a bellwether for future social development deals?

Yes. These bonds can have real social value and that is a big part of their value proposition. Payment is also much quicker than with a traditional policy which is important in the aftermath of disasters.

There are many areas where these deals could have a very positive impact. Even in the US there are many such examples, from flood risk to other new risks.

California is considering forming a wildfire fund, which will be looking for catastrophe coverage. ILS could be the perfect solution there. In any part of the world prone to cat risk and where fast payment would really help recovery, ILS has a strong case.

Paul Schultz is the chief executive of Aon Securities. He can be contacted at: paul.schultz@aon.com