While the insurance-linked securities (ILS) space continues to expand into longer tailed and casualty lines, Leadenhall Capital Partners LLP is taking a cautious stance, with CEO Luca Albertini highlighting the challenges such risk transfers can pose for the capital markets.In recent years, the ILS industry has significantly expanded into long-tail risk categories, such as casualty, fueled by investor demand for diversification and new sources of stable returns.During a recent interview with Artemis, Albertini outlined why Leadenhall remains cautious about this expansion.“We remain cautious about the expansion of the ILS market into longer tailed lines such as casualty.

While diversification and innovation are important to the long-term evolution of the asset class, we believe that the transfer of longer tail risks to the capital markets remains inherently challenging,” Albertini explained.He continued: “One of our primary concerns is the mismatch between investor expectations and the realities of claims development.Longer tail business often involves extended settlement periods and greater uncertainty in ultimate loss development, which complicates both pricing and portfolio management.

“This can create a disconnect between the expected IRR presented at the time of investment and the realized IRR once claims fully develop, potentially eroding investor confidence if outcomes fall short of projections.” Albertini also stresses that the mechanics of cash collateral release in ILS structures becomes significantly more complex when tied to long duration claims handling.“In a declining rate environment, where investors may already be under pressure to achieve target returns, there is a heightened risk of overpromising yields.“This could inadvertently lead to reputational damage for the sector if investors, particularly those less familiar with the nuances of long-tail risk, are disappointed by outcomes,” the CEO explained.

Overall, Albertini states that Leadenhall sees “substantial potential” for ILS growth within property catastrophe and other short-tail risk segments, where transparency, standardisation and efficiency are already proven.“In short, while innovation should continue, we believe the industry should focus on deepening and strengthening the short tail market before seeking aggressive expansion into more opaque risk categories that could undermine the ILS market’s reputation for delivering reliable, diversifying and transparent returns,” the CEO concludes...

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