Twelve Capital probing options for casualty ILS offer

ILS fund manager  Twelve Capital is exploring opportunities to break into the casualty ILS fund space, talking up new possibilities in the field with an eye to crafting a product that might hit the sweet spot of investor interest.

“Given the size of the casualty market in insurance, there is clearly big potential for this to develop; and grow significantly,” Twelve Capital co-founder and executive chairman Urs Ramseier said. Structures, collateral management and eased options for commutation are muss.

Returns could be between 5 to 10 percentage points over risk-free, arguably down from the more dominant catastrophe bond profile which Twelve Capital puts at 8 to 10 points over risk-free, officials believe.

Attempts to transfer casualty risk to the capital markets have been “rather limited” to date.

Casualty lines may have a “difficult reputation” amongst investors who remember the US liability crisis of the 1980’s, see some lingering effects and assume that collateral release is an unmanageable and possibly unending process, Twelve Capital’s head of ILS sourcing, Marcel Grandi, explained.

The advent of AI and the big data era might help put paid to those concerns, Grandi said of the rising opportunity.

Stay away from the high-profile event-driven tail risk and stick to the trend risk defined by the law of large numbers, and the match-up of “immense data” with AI-analytics opens doors. New insurtech platforms and players are bridging gaps to capital markets, he said.

Once you shift from event-triggered to claims-triggered structures, shifting from severity to frequency risks, investors might be drawn to the casualty lines with “stable loss ratios and no really big outliers,” Grandi said, citing a “fair loss ratio”: allowing for risk transfer to capital markets in the 40-45% range.

He sees quota-share style structures where data points to good opportunities for investors to exit contracts/commute at the three to five year mark if sponsors can ensure an efficient market. Alternatively, sponsors could create stop-loss structures ensuring a fixed premium.

Casualty ILS investment options will more likely than not be stand-alone, and not blended with the natural catastrophe risks that dominate the bulk of the ILS investment field, officials claimed.

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