Shaping the Future of Insurance-Linked Securities

Ben Brookes November 13, 2024

The insurance industry has a storied history of adapting to and overcoming challenges, with significant events shaping its evolution.

From the tragic events of 9/11 to the advancements in data quality analytics after the hurricanes of 2005, and the development of approaches to handle unmodeled risk in the wake of the 2011 Thai floods, major catastrophe events have spurred technological and methodological advancements in modeling.

These responses to events have not only enhanced the insurance market's capabilities but also prepared us for facing the era of exponential risk with resilience and innovation.

Looking at the insurance-linked securities (ILS) market, in the years after these major loss events, it has emerged more prominently and as it takes a growing share of peak perils such as those from Florida Citizens being ceded to the ILS market, it finds itself in a unique position, with significant potential for further growth and advancement.

In an era of rapidly evolving risks, there is a growing global need for financial protection, and meeting this demand necessitates the insurance industry to tap into alternative sources of protection to help navigate changes in the risk landscape.

For the ILS sector to seize this moment, it needs to evolve and embrace the previous lessons learned from the broader insurance market.

Data and Analytics: Transforming ILS Risk Assessment

Analytical solutions that have not benefited from this substantial evolution over nearly two decades are relied on for a significant share of ILS market risk assessment. The ability to accurately assess and price risk is tied fundamentally to the quality of data and the sophistication of analytics utilized.

Older tools risk not fully capturing the current risk environment and also limit the ability to embrace new opportunities. We often find ourselves in the market describing the need to generate a more complete view of risk, as emerging research themes drive our ability to add new risk elements into our modeling approaches.

Let's be clear: ILS investors constantly strive to do the best possible job of understanding risk, but with the tools and data available to them, today's ILS market is forced mostly to rely on aggregated, top-down views of risk.

This leads to a tendency toward strong over-conservatism on risk - and significant loadings, both within the model and directly by stakeholders, to account for the many unknowns that could be hidden within aggregated disclosures. We believe this could be a cause of significant price inefficiency.

Reliance on a prevalent, yet aging analytical framework underscores a broader issue within the ILS sector-the critical need for modernization. The convenience and familiarity of established risk analytics tools are undeniable, though the rapid evolution of risk factors, especially those driven by climate change and technological advancements, does call for a more dynamic approach to data analysis and risk modeling.

Overcoming the issues faced by ILS funds today-for example, the increasing prevalence among ILS instruments of earnings perils such as flood, wildfire, and severe convective storm-requires a more nuanced, detailed assessment of risk than today's standard ILS modeling approaches and data disclosure permits.

Contemporary analytical solutions allow the ILS industry to benefit from more robust risk assessment models that accurately anticipate and quantify emerging risks, and also offer a more reliable foundation for decision-making and address the limitations of older systems.

Adopting modern analytics can also enhance the market's overall transparency, making it more attractive to a broader range of investors and strengthening its position within the global financial ecosystem.

The transition to advanced analytics represents a strategic imperative for the ILS market. It is an investment in the future, ensuring that the sector is equipped to tackle the complexities of the modern risk landscape with confidence.

By prioritizing the integration of cutting-edge data and analytical tools like those used by reinsurers, the ILS market can redefine its approach to risk management, paving the way for a more informed, resilient, and dynamic future.

The Impact of Innovation and Technology in ILS

Representing a significant departure from the static, one-size-fits-all products of the past, the forefront of this redefined approach is a shift toward modular modeling solutions. New modular platforms offer unparalleled flexibility, allowing for the seamless integration of new data and rapid adaptation of evolving risk scenarios.

Not just advantageous, this flexibility is essential in accurately capturing the dynamic nature of contemporary risks, ensuring that models evolve in tandem with the changing landscape and that solutions chosen to assess risk are deliberately designed for the unique needs of each business.

Alongside these modular modeling developments is the emergence of artificial intelligence (AI) driven risk insights, with the introduction of AI for risk management allowing for more sophisticated analysis, setting a new standard for the industry, and paving the way for its continued growth and evolution.

By harnessing the power of AI to process and analyze vast datasets, we are unlocking patterns and insights that were previously out of reach, and also significantly reducing the complexity of developing analytics that span across vast and broad data sources.

Moody's is making these investments at scale within our Intelligent Risk Platform, for use across the full insurance value chain, including the ILS market.

Offering a critical advantage, the efficiency and speed afforded by AI-driven analytics enable real-time decision-making and enhance the ILS market's ability to respond swiftly to new requirements.

Complementing these advancements is the adoption of cloud-native catastrophe models, and by utilizing the scalability and accessibility of cloud computing, these models offer a comprehensive view of risks, processing extensive datasets, including satellite imagery and sensor data.

The inherent flexibility of cloud-based solutions ensures that the latest data and insights are readily accessible, facilitating agile and informed risk management strategies. The barriers of yesteryear are gone-no longer is a large infrastructure investment required to run sophisticated catastrophe models.

Adopting new technologies is crucial for the ILS market. Using the latest data analysis and technology, ILS fund managers can make better decisions about risk and price more accurately, leading to smarter investments and better use of funds. Rather than just keeping up with the present; it's about actively creating a better future for the ILS market.

Moving towards using more advanced technology is about making sure the ILS market is stronger, more flexible, and ready to grow. These changes are helping to improve how we manage risk, making it faster, more accurate, and more reliable.

Advancing ILS: Lower Barriers, Greater Opportunities

The ILS industry finds itself at a pivotal moment, where the necessity to move forward, and the convergence of technology has created real opportunities for advancement. Luckily, the barriers to embracing modern analytical methodologies and technological innovations are lower than ever before.

Obstacles posed by the cost of technology adoption, the complexity of integrating new systems, and the inertia of moving away from familiar frameworks have largely been dismantled.

Technology has become more accessible and user-friendly, enabling a smoother transition for the ILS market to harness the power of modular modeling solutions, AI-driven risk analytics, and cloud-native catastrophe models.

For instance, today, with the release of IRP Navigator, our platform customers can use the power of GenAI to get instant answers about any Moody's RMS model-related topics.

Clients using Moody's Research Assistant can generate instant insights across the full range of Moody's research, providing a hugely efficient point of access to the vast wealth of data and analytics therein.

This accessibility is not just a matter of convenience; it's a strategic advantage. The technology needed to redefine an approach to risk management and enhance the resilience of the ILS market is readily available.

Adopting advanced analytics and robust technological infrastructure is no longer a daunting prospect but a practical and necessary step toward securing a more informed, dynamic, and resilient future.

And we are just getting started. Moody's is making tremendous investments in the Intelligent Risk Platform, our GenAI capabilities, and across the whole Moody's estate-providing yet more compelling reasons to ensure ILS funds begin their IRP adoption with urgency.

The Future of ILS: Growth, Resilience, and Excellence

The significant opportunities for growth and advancement in the ILS market are more evident than ever. Technological integration and innovation are not just about adapting to the present; it's about actively shaping the future. With the barriers to entry lowered and the necessary technology within reach, the ILS market is poised to seize this moment.

The adoption of advanced tools and methodologies will ensure that the ILS market positions itself at the forefront of the insurance industry, ready to meet the demands of an era marked by exponential risk.

The future of ILS is bright, buoyed by the promise of technological innovation and the strategic opportunities it presents. As the barriers to entry continue to lower, the path forward becomes increasingly clear, setting the stage for a new chapter of ILS-a chapter defined by growth, resilience, and the pursuit of excellence.

Ben Brookes

Managing Director - Advisory Services, Moody's

As head of Moody's Consulting Services team, Ben oversees the services work that helps customers maximize the benefits of working with Moody's RMS models, data, and applications. He leads a multi-disciplinary services team, comprising nearly 50 individuals with a combined market experience of more than 200 years.

Ben's leadership role covers all areas of the market, from implementation and technical consulting to on-board and deploy Moody's solutions, to process and workflow engagements that help drive the significant business benefits that flow from a robust view of risk, and through to the quantification of risk to support risk transfer, including innovative forms of risk packaging.

During his 16 years with Moody's, Ben has led numerous services teams, and business development for establishing best practices in new markets for the business, such as public sector and broad financial services. Ben is closely involved with the significant investments that Moody's makes in climate change. Ben holds an MEng in engineering mathematics from the University of Bristol.

• #ILS technology
• #Intelligent Risk Platform
• #GenAI
• #IRP Navigator
• #insurance-linked securities
• #Moody's Research Assistant