Steve Evans of Explains the ILS Market

Stewart: Welcome to another edition of the Podcast. My name’s Stewart Foley, I’ll be your host. Welcome back, we’ve got a great one for you today, insurance-linked securities. That’s a class that I don’t really know well and I’m looking forward to learning all about it from Steve Evans who’s the owner and Editor-in-Chief of Artemis and Reinsurance News. Steve, welcome, thanks for being on.

Steve: Thanks, Stewart, really good to speak with you today.

Stewart: We’re thrilled to have you and I want to let our audience know. Artemis, it can be found at and Reinsurance News at just so people can find what you’re doing. Before we go too far, what is your hometown, the one you grew up in, what was your first job of any kind, not the fancy one, and a fun fact?

Steve: Oh, okay, that’s a good one. So hometown, actually I count both Ireland and England as my homes because I grew up as a child in Ireland, we lived in Dublin. But I was actually born in the UK, in the north of England. And for the last 27, 28 years, I’ve been living in Brighton which is on the South Coast of the UK, about an hour south of London. So Brighton is now my home, but I still have a strong affinity with the Republic of Ireland having spent 14 years there as a child and teenager.

Stewart: Outstanding. What was your first job?

Steve: Well, I mean, my first paying job was a paper round, so very unglamorous at the age of about 11, I guess. But my first proper career job post-college and all of that, I was actually very lucky and I fell into an internet company in 1996, so very early days of the internet and everything we did was for the insurance industry. That’s kind of where Artemis came out of as well because Artemis was 24 years old this year and I built the first version in late 1998 and we launched it in 1999. We did some really quite cutting edge things like we built a weather derivatives trading platform on the internet in 1998 and we did personal injury claims prediction engine that used fuzzy logic in the late 90s as well, which was really the precursor to artificial intelligence.

Stewart: Very cool.

Steve: So were what people now call Insurtech long before Insurtech was actually a thing.

Stewart: Wow, that’s so cool. I mean, that could be your fun fact.

Steve: That is a fun fact.

Stewart: Yeah, that’s a good fun fact. I mean, I’m impressed, man. It’s great.

Steve: I think I have a better one for you though. So, obviously, I built Artemis for my employer at the time, I then took ownership of Artemis after that company had been sold, and when I left the people who they sold that company to, I took ownership of it and it lay dormant for a little while and I worked in the e-commerce world in travel and retail and things like that, running big e-commerce projects. But I then took a sabbatical and went traveling and I actually rebuilt Artemis during a month-long trip through Russia on the Trans-Siberian Express.

Stewart: Oh, wow. Wow, that is cool. Look at you. That’s awesome. So, before we dive into the world of insurance-linked securities, I’d love to know what was the most unexpected or unusual aspect of the ILS market that you discovered when you first entered the industry?

Steve: So, I guess I’ve been schooled in the legacy way of doing insurance and reinsurance, Lloyd’s of London was a massive component of that, obviously. It was all about balance sheets and all about very strict insurance-related regulation and then we, I guess it was around what? It was 1996 the first year where I was doing that job, and we discovered that there people in the capital markets who actually appreciated specifically peak catastrophe risk, so earthquake, hurricanes, typhoons, that sort of thing, as an asset class. That was really fascinating to me because the insurance market is enormous, obviously, has a huge balance sheet of trillions of dollar globally, the reinsurance market is $500, $600 billion in terms of its balance sheet, but then you start to talk about transferring some of that risk to institutional investors in the capital markets and you’re talking hundreds of trillions of dollars are suddenly available and there were some really enormous investors who appreciated that.

Stewart: That’s interesting. So just to level-set things, can you define what are insurance-linked securities?

Steve: Sure. So, at their most basic they are securities, so it’s a securitization transaction and the core risk within those securities is the pure underwritten insured catastrophe risk in the majority of cases. So, the most basic instrument, or the longest standing instruments within insurance-linked securities are what are called catastrophe bonds, and essentially, it’s a very tightly controlled transaction that features insured exposures which are packaged up into something that can be broken down into security notes and then sold to investors in a format where they can put them into their portfolios or funds.

Stewart: And can you help me through how the ILS market has evolved over the years and what are some of the key trends that you’re currently observing as your role as editor and owner or Artemis and Reinsurance News?

Steve: Sure. So the first catastrophe bond came to market in 1996, late 1996. That marketplace grew slowly, really the main reason for that market emerging was that the largest insurers and reinsurers in the world felt that they needed to diversify their sources of protection, so the capital that they were using, they wanted to access institutional investors who had an appetite for risk and it was a great way to diversify away from purely reinsuring yourself with another reinsurer essentially. So, it’s the kind of thing that a very large global insurer or reinsurer might buy a few catastrophe bonds which make up maybe 10% of its overall protection or something like that. The history of the market, it started off largely CAT bond only, but quite quickly some innovative people in the space realized that the best way to build portfolios and get this out to investors was to start to structure reinsurance in investible forms, and that really was what developed what we now call collateralized reinsurance.

I should say that all of these ILS instruments are 100% or very near to 100% fully collateralized with cash or equivalent treasuries, that sort of thing. So, they’re very, very high credit quality whereas when you entered into the reinsurance deal, you are relying on a promise to pay from the reinsurer with a catastrophe bond or a collateralized reinsurance deal. The money is in the bank, it’s held in a trust which is remote which has specific rules around the trust account as to who can draw from it and when. So the investors are protected, but perhaps just importantly the cedents as we call them, the people transferring risk into those structures are also protected, that the capital will be there when bad things happen.

Stewart: And if I understand this correctly and I’m going to, at the risk of gross oversimplification, if I’m an investor in a CAT bond, my return is driven by whether or not the wind blows, right? It’s completely uncorrelated with financial markets, for example, which makes it a very powerful diversifier, is that fair?

Steve: Absolutely, from an asset owner point or an asset investor point of view it’s the diversification that they like within this asset class. It is, as you say, uncorrelated with financial markets because the downside comes when a bad catastrophe event occurs. It doesn’t go down when there’s financial market movements, for example. It’s difficult to say something is completely uncorrelated because there can be a reverse correlation if you had a really terrible earthquake, that could cause financial markets to fall. But when we have seen that happen, typically the financial markets recover very quickly anyway. So, the diversification still is effective.

Stewart: And can you explain the role that, I want to make sure people can find you, what role plays in the ILS market and what makes it stand out amongst other platforms in this space?

Steve: Sure, I’ll take it right back to the beginning. When we launched Artemis, we felt that the industry needed a place to coalesce around, so a hub that would provide information that would help them do their day jobs. It was a very private marketplace, being securities, information was very limited, you didn’t really know what was going on unless you were already involved in that market, and when launched Artemis, we felt there were about 200 people in the world we cared about who we wanted to read us. Today we can do anything over 50,000, 60,000 readers in a single month with Artemis. It’s very, very widely read, the most widely read by a significant margin on that topic and actually one of the most widely read publications in the world on reinsurance full stop, despite the fact we only cover a very small component of that, really.

Our role is to provide transparency around what’s going in the marketplace and to provide information that we feel will help people do their day jobs. We have a very good reputation in the industry, people do rely on us for the data flow, but we’re also very lucky. We have very good relationships with the people in the industry as well and they’re very transparent with us, which helps us to understand the motives on both the risk side and also on the investor side as well.

Stewart: It’s interesting, the person that suggested that we meet told me, I mean, we’re very similar in our mission, right? We’re trying to provide a place where insurance investment professionals can come and learn, and research, and figure out without an axe, one way or the other. I mean, your readership is just enormous by comparison and it’s really… I mean, congratulations to you, that is a real testament. I mean, it’s just 50,000 to 60,000 readers a month is just a mind-boggling number to me. So, with regard to Reinsurance News, how does that relate to Artemis and how is it different?

Steve: So, Reinsurance News covers traditional reinsurance in the main. We also cover commercials, specialty wholesale, insurance industry news that we feel is going to be interesting to people who are buyers or sellers of reinsurance. So, it’s a much broader scope in terms of the content that we produce. We are essentially just a news platform, we cover the news cycle, we interview people, we produce analysis reports, thought leadership, that sort of thing. Reinsurance News is incredibly widely read though, our peak month so far is around 250,000 readers in a month-

Stewart: Wow.

Steve: … it’s very, very popular. It is one of the most widely read insurance-related publications in the world now, and really launched that to just provide, similar to Artemis, somewhere that’s a reliable frequent publishing source of insight that people can consume to help them keep abreast of what’s going on in the industry and then people who want to work with us can really know that they’re going to get in front of a very large and relevant audience. My career has always been about building relevance in audiences, online in particular, so that’s one of the reasons we have a large audience which we index incredibly well in places like Google, we do incredibly well in social media, and that, obviously, really helps.

Stewart: Absolutely. After this podcast, maybe you can give a couple of tips. So, who buys ILS from protection and why?

Steve: So, the biggest buyers would be insurers and reinsurers, they’re buying it as part of their reinsurance or what is known as their retrocession, so reinsurance companies buy retrocession which is essentially a reinsurance for a reinsurer. So, they’re the two main buyers, but we do see some very diverse organizations coming to market and they’re largely trying to just access additional capacity or a diversifying source of capacity. So we’ve governments issuing catastrophe bonds or sponsoring catastrophe bonds, the World Bank is very fundamental to the catastrophe bond market. They act as a facilitator and an intermediator to help countries like Jamaica, Chile, Mexico get access to earthquake, hurricane insurance protection. Essentially the governments are buying the protection to fund disaster recovery and also to help them avoid having to issue debt when really bad natural disasters occur.

But we also see some really interesting corporate buyers as well. So, Google is one example of a company that has sponsored catastrophe bonds to secure earthquake reinsurance protection. We’ve even seen one of the largest mortgage investors in the world, so they invest in mortgage-backed securities and portfolios or mortgages in the US and they came to market with a CAT bond to hedge out some of the earthquake exposure that was within their investment portfolio. So, it’s quite diverse.

Stewart: That’s really interesting. So, considering recent global events, I mean, climate change, pandemic, we’ve got the geopolitical environment is challenging to say the least, how do you see these things influencing the ILS market and its prospects for growth going forward here?

Steve: So, I guess it has an influence on both sides. One on the potential supply side for risk, particularly when it’s climate related. Obviously, climate-related risks include weather risks, there’s climate influence on hurricanes, and things like that. So over time we would expect people to be buying more protection; that ultimately will result in some more of that protection being bought from the capital market in the form of ILS.

But then on the opposite side, all of these events have an influence on investor motivation and appetite for risk as well. So, investors are increasingly wanting to see evidence of how climate risk is being modeled. They want to know that it’s being considered and taken account of in the risk metrics for catastrophe bond covering hurricanes, for example, but also global macro events such as we’ve seen in the last few years from the pandemic, Ukraine, the effects that we saw in capital markets through really early this year where asset values dropped. That all has a bearing on how much capacity is available to support the CAT bond market and earlier this year we really did see, as asset values were dropping across numerous asset classes around the world, some of the biggest investors in the ILS market were finding it difficult to increase and, in some cases, actually had to decrease. Because, for example, if you’re a large pension in Europe, you may have a predefined allocation contribution to ILS, which is maybe 2% of your portfolio, that’s a reasonable amount that some investors might target, but when everything else in your portfolio loses value but your ILS doesn’t because it’s uncorrelated, some of them had to reduce their allocation slightly because they had these very strict targets in place.

Stewart: That’s interesting. So, what the investment community would refer to as the denominator effect, right? The denominator shrinks and the exposure to that particular asset class increases as a result. That’s really interesting. So, how has the market changed over the last decade, how has it developed, and where do you see it going from here? It seems to me that this market’s got a lot of upside from here, that’s just me looking at it and it’s more of a gut feeling than it is by anything based on fact. Can you help me with developments and what it looks like going forward?

Steve: Sure. So, the last decade has been particularly interesting. So, the ILS market grew quite significantly after the Global Financial Crisis. That was really where large pensions, family offices, endowments, and sovereign wealth funds around the world discovered ILS because the ILS market really proved itself as a diversifier through the Global Financial Crisis. In fact, a lot of hedge funds who were in CAT bonds, they were the only liquid asset that they could sell and get full value on in 2008, 2009. So actually, hedge funds left the market but they were very quickly replaced by much bigger longer-term investors which was good for the market. But that did drive a lot of capital in. At the same time, the reinsurance market was also growing quite significantly and we went through what we would call a softening period where essentially rates and pricing dropped quite a lot. During that softening period, what you also tend to see in reinsurance, in general, is the terms and conditions end up stretching as well as they do in other marketplaces. Everything’s getting cheaper and people are trying to stretch the terms to make capital compete.

We then ended up in a period where we were kind of at the softest pricing with the widest terms possible and then 2017 came along and we had three major US hurricanes in a single year. That caused quite an issue in terms of losses for space and that made quite a few investors think again, I guess, and reconsider what they were allocating to and why. 2018 was then difficult again for slightly different reasons, we saw smaller hurricanes, but we also saw the California wildfires that were really significant. And over the last few years we’ve also seen major wildfires and floods in Australia and more hurricanes in the US and Japanese typhoons and things like that.

So there’s been a lot of events that hurt the reinsurance market therefore they end up hurting the ILS market, there were losses to pay. And there’s been a period of reflection, I guess, and that reflection has been across insurance and reinsurance and a big part of that is actually people stepping back to take a view on climate and the contribution of that to their losses, take a view on whether the risk models that people use were accurate and being kept up do date well enough, and also take a view on other macro factors. At the same time, we’ve had this inflation which while, I guess, it’s the last year and a half or so we’ve seen inflation really been peaking, there’s a big feeling in the insurance industry that inflationary pressures, particularly on rebuild costs for property in the United States had been building up for quite a while and perhaps hadn’t been fully estimated in terms of accurate valuations and perhaps not been coming through, they hadn’t been as regularly updated as they should be.

So, we’ve ended up in the situation where we then get financial macro conditions that are shrinking balance sheets in terms of the asset prices and things like that, because that affected reinsurers as well, and we ended up in a situation with a reduced amount of capacity available. So right now we are in the hardest market in, terms of pricing, that we’ve seen in well over a decade and that goes for traditional reinsurance and catastrophe bonds and other forms of ILS. And, at the same, time because it’s a hard market, the capital, the risk capacity has much more prominence in the discussion, I suppose, and those terms and conditions that have been widening and loosening are now becoming tighter again. So, things are becoming a lot more positive for the deal economics, the economics of ILS are as good as they’ve been for at least 13 to 15 years, I feel, at this point in time as an investment proposition.

Stewart: Wow, that’s fantastic. What usually happens at that point is what’s called the insurance cycle, which is where capital now comes into a hard market and serves to soften it again, do you see that beginning to happen?

Steve: We are already seeing that happen in catastrophe bonds first because one of the things about catastrophe bonds is they get issued largely throughout the years. So capital flows in outside of the traditional reinsurance renewal dates. We’re just coming up to one of the biggest reinsurance renewals of the year, so June and July, that’s when a lot of Florida specifically and also US-wide catastrophe contracts get renewed and my gut feel is prices will still go up on last year, but they won’t go up quite as far as people had perhaps thought even 6 months ago. So I think we have just about reached the peak and we’re maybe just in the start of softening of that peak. The question for me now is how disciplined the market is going to be going forwards and can we hold the baseline well above where it had got down to in the mid-2010s because clearly the pricing had softened so far that the economics really weren’t in favor of the investors at that point in time.

Stewart: Very cool, I appreciate your viewpoint, I mean, you know this market so well. I think one of the things is about the ILS market is it’s often viewed as complex and niche. What are some common misconceptions what people have about the ILS market that you’d like to set the record straight on?

Steve: I guess the main one would be, and this gets rolled out by the traditional mainstream press a lot of the time, that people are betting on disaster. It’s quite the opposite, people are essentially willing to get paid for taking on disaster risk and the money that they put in when they lose it goes to refund development, help people recover from disasters. It’s essentially insurance capital just coming in, in a different form. To me that’s a really important thing because and the entire insurance and reinsurance industry feel that things are still underinsured globally. I mean, when we see the numbers come out of the end of the year of how much in catastrophe losses they’ve had in the United States, it transpires that at least 40% tends to be economic and uninsured. So, there’s a big gap that doesn’t get insured and the insurance industry alone doesn’t seem to be able to fill that.

Now, obviously, part of that is consumer demand and the willingness to spend money on insurance, but the more capital comes in, and particularly if that capital comes in with a view that perhaps it can have a slightly lower cost attached because of the diversification benefits and the fact it comes from very large allocators, then to me that’s a very positive thing because it should help to increase insurance penetration ultimately.

Stewart: That’s fantastic, I have learned so much. I am now perfectly capable of practicing without a license in the ILS market, so that’s perfect. We’ve got a wrap question, people are like, “Stop asking people what they’d tell their 21-year-old self because you’ve asked everybody that,” and I’m like, “Okay.” So, you get a choice of two. What’s the piece of advice you ever got, or who would you most like to have lunch with, alive or dead?

Steve: I’ll go with the best piece of advice.

Stewart: Okay, good deal.

Steve: Which actually would’ve come from the person who hired me back in 1996 and who was really my confounder in Artemis. He’s a bit of visionary, he remains in the insurance industry a very senior level, spends a lot of his time thinking about climate change and liaising with all of the biggest actors in the world in terms of the UN and the big multilateral organizations. A man called Rowan Douglas, from WTW, and he really advised me about risk transfer right from the very start because I knew nothing about insurance when I started working for him, apart from how to buy it as a consumer. But he helped me to break things down and think about it in a more simple way in terms of connecting risk and capital and the benefit of capital being available as a shock absorber, essentially, for people’s lives but also for balance sheets and for government budgets as well.

Stewart: That’s fantastic. So, thanks for being on, I really appreciate it. We’ve been joined by Steve Evans who’s the owner and editor of Artemis, you can find them at, and Reinsurance News at Steve, thanks for taking the time.

Steve: Sure, thank you. It’s been a pleasure to speak with you, really appreciate it.

Stewart: Thanks very much. Thanks for listening. If you have ideas for podcasts, please shoot me a note at Please rate us, like us, and review us on Apple Podcast, we certainly appreciate it. My name is Stewart Foley and this is the Podcast.

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