Australian ILS investors want risk-adjusted renewal improvements, not just rate

Three insurance-linked securities (ILS) investors from Australian institutions all agreed that while they are cautiously optimistic about the trajectory of reinsurance renewal rates at January 2021, they want to see risk-adjusted improvements, not just premium rate increases.

Speaking during a virtual panel discussion as part of the ILS Bermuda Convergence 2020 event this week, the three institutional investor allocators to insurance-linked securities (ILS) made it clear they expect to see further work on tightening up of reinsurance terms by ILS fund managers.

Jehan Sukla, Co-Head of Alternative Strategies at Australian multi-class investment specialists MLC Asset Management, said that rates are only on their way back to where he’d like to see them in ILS.

“I think we’ve seen reasonably robust improvements in pricing over the last couple of years and I think that has needed to happen, given where pricing was going back to levels seen in 2015-16.

“We’re probably at the lower-end of our target levels, in terms of the excess premium we think we need to be paid over and above the modelled loss, to be comfortable that we’re earning a reasonable rate of return on our capital. So I think that’s been healthy,” Sukla explained.

Kathy Huang, Portfolio Manager, ILS at Australian life insurer Challenger Life, noted that the expectation is that the upcoming reinsurance renewals see further rate improvements, “The question we always ask is whether the investment is providing the right compensation for the risk that we take. That’s the lens we use to look at investments.

“On one side, yes I’m under the impression that there will be significant increases in rates. But we’re also hoping to see some tightening of language.”

Also speaking during the panel discussion, Craig Dandurand, Head of Debt at significant Australian institutional investor the Future Fund, also noted cautious optimism on the outcome for ILS at the upcoming renewals, but also noted that for institutional investors, ILS remains a relatively new proposition.

“On an absolute basis we’re cautiously optimistic. You have an asset class that is not easily accessed rapidly and isn’t getting a push, if you will, from central bank policy that are putting very large amounts of capital into the economic system and into the capital markets.

“So to the extent that there’s a lack of a technical headwind there, then that means our capital maybe greener in insurance than other sectors. So that’s where the caution lies,” Dandurand explained.

Sukla went on to explain that for most ILS investors now, after the recent years of losses and experience with trapping of collateral, the focus is on more than just pure rate.

Sukla said, “The other side of the equation is risk and considering premiums in terms of risk-adjusted return. We’ll certainly be looking for improvements in definitions of risk, tightening up of contract wording in respect of peril coverage.

“That’s the other side of the equation, that we’ll hopefully have improvements on. We’re certainly looking for improvements in rates and improvements on a risk-adjusted basis.”

Huang agreed, saying, “On the risk side, are the risks properly modelled and properly priced. So going back, to are they providing compensation for the risk.”

But also adding, “Yes, we are excited about the year-end renewal.”

Dandurand of the Future Fund also commented that his, “caution probably lies in the fact that every year we seem to learn about another risk, that may not have been as obvious in underwriting in previous years.”

Meaning that, “The good news is we continue to learn about the risk, but the bad news is we continue to pay for it as well.”