Schroders launches ILS life fund; Lohmann mulls effect of buffer clauses

Asset manager Schroders is close to fully launching a new fund dedicated to life insurance-linked securities (ILS), according to industry veteran Dirk Lohmann, the CEO of Secquaero, the fund manager 50.1 percent-owned by Schroders.

The fund and mandates being launched are Schroder funds managed by Schroders. Secquaero will be Schroders’ exclusive adviser on ILS investment strategies.

Lohmann said the fund has commitments from a number of investors and some deals in the pipeline. He expects the fund to be up and running by the end of October.

He believes demand for this form of risk transfer is growing as large insurers and banks with sizeable books of this long-tail risk on their book seek to monetise the future value of such blocks of business now and free up capital.

Such is the size and complexity of many of these deals, only a small number of the biggest reinsurers currently participate in this market. And some of these players are increasingly wary of taking too much of a concentration of this risk.

This means that there could be a role for investors from the capital markets to participate in this space, via funds such the one Lohmann is launching.

“This could be alongside reinsurers or by doing standalone deals. The very big deals tend to go out to tender and we will make our interest known in this but we have some smaller deals that we have originated ourselves.”

This new fund will complement the other funds managed by Secquaero, which include funds that invest in short tail risk including collateralised reinsurance and ILS in Europe and globally.

Lohmann said he believes that losses from Harvey and Irma will be an interesting test for the market but, as things stand, they will inflict a “flesh wound” on the industry as opposed to anything more serious.

He believes there may be a small number of investors who entered the market seeking yield and “may not have been prepared for the volatility”, but these will be in the minority.

“Most investors we have spoken to think this could be a good time to reinvest in the market,” he said.

He added that an interesting aspect of the recent losses will be the way so-called buffer clauses contained in the contracts on collateralised deals respond, and what this could mean for available capacity.

A buffer clause is essentially a mechanism by which an early loss estimate on a policy is multiplied by a pre-agreed percentage to account for the fact that eventual losses could be much higher. Based on this calculation, a reinsurer or fund is compelled to leave the collateral in the structure for a pre-agreed period while final losses are agreed. This can be as long as three years in the case of earthquake claims, and two years for wind.

These clauses could mean that a large amount of collateral becomes tied up in the aftermath of a large catastrophe, even though much of it may never be used to pay a claim. This could restrict the capacity available to the market in the aftermath of a loss event, affecting pricing and potentially meaning that more new capital needs to be found by the market than expected.

“That could take a lot of existing capacity out of the market and fresh money would then need to be found. The question is to what extent this will happen and what both investors’ and cedants’ appetites will be like after a big loss. There could be more demand from cedants,” Lohmann said.

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