High losses in the insurance and reinsurance industries have set the tone for 2018. Andre Perez of Horseshoe Group, an independent financial services company dedicated to both the Insurance Linked Securities (ILS) and alternative fund markets, discusses these trends and shares his market outlook
2017 was a year of heightened NatCat and Terrorism related incidents. From your perspective, how well did the ILS industry deal with them?
How is the industry dealing with trapped collateral from these events?
With Florida being the biggest market for the industry and as loss assessments are still pending in many cases, would the June cycle be materially different to the Jan cycle?
Houston was very significant in terms of the damage caused. Do you see the market expanding in a meaningful way to cover this exposure?
What has been the impact on 2018 capital raising activity for the industry?
Market structures invested in World Bank or IBRD notes in 2017. As interest rates begin to move up, do you think managers will shift back to more traditional investments in the search for yield and better liquidity for events and claims?
What were the lessons learned and how can industry better prepare for future?
From an ILS perspective, the catastrophe events did not necessarily come out of the left field. As long as we have those ‘CNN-type’ events there should be little surprises to ILS investors. What will be interesting is the magnitude of premium increases that materialise over 2018 renewals. We will also need to watch if the market is in overcapacity mode.
From an investor perspective, it is an attractive area to invest because of the low correlation and diversification to the traditional investment portfolio and hopefully they are getting some decent return. Investors are enquiring about the January 1 renewals rate increases but I think we need to go through the full cycle, wait for the June 1s and the July 1s, before they can make any conclusion and say ‘ok folks you lost a bunch of money and you weren’t able to get a decent return, is this the industry we want to be in?’
What developments are you seeing in the platform space?
If more money is raised presumably that means more transactions are getting done on the ILS front and hence more trusts are needed. So the more money the industry raises, the more the industry expands into new risks or new classes of business. There is definitely pressure from a cost perspective and that’s one area that we as a service provider to the ILS industry have a vested interest in.
Being the largest ILS service provider in the world, it behoves us to make it effortless and painless for people to execute an ILS transaction. If you enter into a traditional reinsurance transaction all you need to worry about is the reinsurance contract and that’s it. Whereas for a collateralised reinsurance transaction there’s the reinsurance contract as well but you also have to deal with the subscription and shareholder agreement which is the relationship between the reinsurance transformer and the original investor and you have to set up a trust account to deposit the collateral. The setting up of trust accounts and associated documentation need to be simplified. Ten years ago, there was very little negotiation of the trust document: it was a matter of ‘this is a trust template’ we fill out the blanks and we are done. Then at some point in time someone said maybe there are things we can negotiate within the trust document, thus kick-starting the whole process of having to deal with the cedents and the number of trustees and then the investors and it has become a bit of a nightmare especially if lawyers are involved. So my wish for the future is that we get a standardised market accepted trust document for collateralized reinsurance transaction and all we have to do is fill the blanks. Let’s not forget speed to market is crucial. If we can get all documents associated with a collateralized reinsurance transaction executed quickly, ILS will solidify its position as a viable alternative to the traditional reinsurance market.
What should trust providers be preparing for?
We need to effectively and universally address issues in trust agreements such as joint and several liability, limited recourse and the collateral top up. Some reinsurance brokers are pushing the envelope on trust agreement clauses by shifting more liability to ILS investors and are potentially endangering the soundness of the ILS market. As a self-preserving market, we need to stop that perilous trend.
Last but not least, from a trustee perspective, we need to simplify the whole AML/ KYC process. If you’re a pretty big trustee or trust provider you likely have an exposure to pretty much the whole universe of reinsurers and a fairly good chunk of relationships of original cedents on which you have already done the AML/KYC. So let’s try to make sure we don’t have to go through that exercise at the last minute. Perhaps a central repository of AML/KYC information which can be accessible to all the trustees could be one solution to accelerate the process.
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