What Extreme Weather Events Are Doing to Global Insurance Markets

comes to an end. That's right. It's so starts on June one and it ends at the end of November. And it has been an unusual season for hurricanes. I think it was really quiet right through August, and I actually tweeted something about this, so maybe I jinxed it. But then in September we had a whole bunch of hurricanes, I think four major ones, including Hurricane Ian, which was the deadliest hurricane to hit the US in two decades. Yeah, this is always kind of I mean, it's kind of random.

It's interesting because I think of Florida as being like an hurricane Alliott, right and right there, but it hadn't actually been hit by a hurricane in a long time, but this was a really big one. I'm seeing something that at least over fifty billion dollars in damage. And then beyond hurricanes, and we'll talk about them, obviously, like weather and extreme weather events seems to come up a lot for us in terms of things we talked about

climate risk, drought, the heat of rivers and lakes. Weather seems to be popping up a lot, but we haven't actually really like talked about that as a consistent thing. No, So we had this erratic hurricane season, but we also had major droughts around the world. As you mentioned, there was a drought even in in the Northeast in places

like Connecticut, which is kind of unusual. Made your extreme weather events seem to be happening more often, and this kind of begs the question of how the financial industry is thinking about this, because of course there is a lot of money that is related to things like the weather, right, and so we think of, you know, obviously, when there is a major hurricane with pupils, homes and infrastructure being destroyed, the sort of straightforward insurance reinsurance cost associated with that,

and then of course all these other things that create business disruptions of various swords. Again, going back to the drought, we recently talked about affecting the corn market on the Mississippi River, and so yes, financial implications abound from unpredictable variations in the weather absolutely, And today I am very pleased to say we are going to be discussing something that we've been meaning to for a long time, which is how the insurance industry is basically handling extreme weather

events and what the implications of extreme weather events are for the vast ecosystem of insurance links, securities and products and reinsurance. There's this whole massive pool of money that is basically set up for these events, but it feels like we don't talk about it often enough. So we're going to rectify that today with someone who talks about it all the time. We're going to be speaking with

Steve Evans. He is, of course the owner of Artemis, which is a publication covering the insurance linked securities market, and he is also the owner of Reinsurance News, So really the perfect person. Yeah, all right, Steve, thank you so much for coming on. Ad thoughts. Thank you, Tracy, thank you Joe. It's a pleasure to be here and I've I've been looking forward to being one of the

perfect guests as an avid listener. Thank you. So, maybe just to begin with, can you talk about, like from your perspective, from the insurance industry perspective, does it seem like extreme weather is becoming more of an issue? Is this a topic that is cropping up more for you? And absolutely it's an area that's cropping up even more these days. I mean, extreme weather has been something that the insurance industry has provided capital to support for hundreds

of years now. I mean it's one of the major risks that the marine insurance market covered. When you were heading off across the Atlantic to go and gather your commodities from overseas, you'd you'd want to make sure that your boat was going to make it back on in one piece, and storms were one of the things that you wanted financial protection against. So the insurance industry has been in this space for forever, really since the industry began, but I guess over the last sort of two decades

it's become an increasingly important focus point. Obviously with the climate change discussion alongside that as well. Now I guess insurance in range Duras are hedging weather within many of their product sets. But then you have the specific area of the market that really interests me, which is around catastrophe, severe weather, and all of the areas you you mentioned in your opener there, and this is an area that's

just become much more sophisticated. I guess it's probably three decades now since the first major catastrophe models came along, which were software designed to really help people not predict when whether it's going to happen, but understand the magnitude of the potential impacts it could have and how that would affect portfolios, whether that's portfolios of insurance, rare score,

portfolios of property. And I guess the the advent of the cat model, which really they pretty much came out of places like universities in the States and even Silicon Valley, one of the main cat modeling firms came out of. That's really helped the industry to get a better hand along catastrophe risk and help to develop the whole catastrophe insurance market into something that's a really meaningful piece of

overall insurance capital today. And alongside that, we also have everything from weather derivatives to swaps between companies, and what's called parametric insurance, which is another area of the market that's particularly interesting right now and moving forwards very rapidly, particularly with what we always refer to as the insure

tech trend, where tech advancements are coming into insurance carriers. Finally, it's taken a while, but now companies are increasingly looking at new ways to construct products to help their customers hedge risk as well, just on the modeling points. So my my impression of the insurance links securities industry is that one of the reasons it became so big was because of improvements in weather modeling, and it gave investors maybe some reassurance that they were gauging and pricing weather

related risks more accurately. Has that been a major factor in the growth and development of this market. Absolutely. I mean, I guess there's there's two types of technology that really helped the insurance lon securities market come about. There's the the advent of the cat model. Then the sort of advancement of the cat model into the two main peak perils,

which are really predominantly US hurricane risk. That's really the peak exposure in the whole world, but then other cyclone and storm risks around the world, and then earthquake risk being the other one. When the cat models came around, it helped companies to really understand what exposure they were

taking on. So I'm thinking about the insurance and reinsurance companies of the world there, and they realized that really that the capacity within the insurance market itself was probably not sufficient for the really peak events if you think about a Cat five hurricane barreling into Miami one day, or San Francisco having a really serious earthquake event, or Tokyo or any of the other big cities of the world.

And there was a sort of a recognition that tapping into the deepest, most liquid pool of capital available would be a beneficial thing for the insurance and reinsurance market. It's already funded by institutional investors, obviously on the shareholder side, but this was seen whether there could be the development of almost a companion source of risk capital that the companies in the insurance space could tap into. And so really the next bit of technology alongside the cat models

was actually financial technology. So the plumbing of the financial world and predominantly the fund structure and securitization as well.

That helped very bright people in the early days and very small companies that are sometimes span out of existing reinsurers or sometimes set up as like individual hedge fund type managers, and they started to construct financial all instruments that would allow catastrophe risk to be contained within them, modeling to be put against that, to develop the understanding for that risk, and to enable a price to be put on it as well, and then that was issued

out in a form that was investable. And so these sort of niche little hedge funds that set themselves up and started to target the space could build portfolios for their third party investor base. So I think without the cap models, it would have been very hard to see the I l S market, as we call it development. So I have a short quotion first, but how big is this? Are these markets that we're talking about so

very difficult to give an accurate number. It's changing all the time with events and thing as a land and within flows and outflows. But it's been estimated that global sort of reinsurance capital has been somewhere around the six hundred billion ish mark for a few years. The I L S capital within that is anywhere between eighty to a hundred billion, depending on which type of structures and

funds and things like that you include within it. So the thing that I maybe her once or that my understanding is that part of the appeal of investments that essentially lose money when there's a big catastrophe is that, you know, people are always seeking uncorrelated returns, and so much of the economy is correlated because when there's a recession and everything is hit all at once, and that the physical catastrophes, whether they be hurricanes or earthquakes or

other storms, are at a type of risk that is not going to be cyclical related to the economy, because hurricanes can happen in recessions or booms. And so does it work out like that in practice and theory? I get that that makes total sense. In practice. Do securities that are linked to extreme events properly exhibit these sort of uncorrelated payout structures. It's a very good question. Definitely. The lack of correlation is an important aspect that attracts

investors to the space. Now, I say lack of correlation because I don't think anything is ever fully uncorrelated when you're talking about potentially world changing events. So a good example actually is the Tohoku earthquake consumed army in Japan. Now that was a very major insurance market event. It had some impact to the I L S market, including to a number of catastrophe bonds, mostly in marketer market loss. It's for the cap on market that there were some

drawdowns of principle as well. And when that event occurred, there was a decline in Japanese equities, there was a decline in the Japanese economy and things like that, but that will bounced back quite quickly. So I think predominantly

natural catastrophe and weather risk are diversifying. I would never say totally uncorrelated, because I think when the biggest sort of market moving events occur in the KNAT CAT space, they're still going to move some indices, but the recovery from the event should be far far quicker, and so

it's really a very very far tail risk correlation. I would say a lot of people talk about I L S as being lightly correlated or loosely correlated rather than being completely uncorrelated, and I think investors should really be educated to the degree that a correlation could occur but it's probably not going to be something that you really need to worry about in the overall scheme of your portfolio.

I remember this was something that came up when I was writing about the World Bank's pandemic which failed to trigger, and you know, one of the selling points for those was, well, by pandemic exposure going to be uncoorrelated. But then you have this massive global pandemic and the market's absolutely dropped, and it turns out that you know, it was rather correlated.

But okay, Steve, a related question, can you talk a little bit about the pricing of cat bonds or other insurance linked securities and products, because this is also kind of a sensitive point, which is you want it priced enough that investors are going to come in and buy these things because they feel they're being accurately compensated for the risk that the bonds are potentially going to get written down to zero or something like that if there

is a major catastrophe. But at the same time, you don't want the payout to be so rich that it becomes uneconomical for the insurers or the governments who are actually issuing these things. So how are people thinking about that pricing aspect, especially as we get more extreme weather events, our investors demanding more of a return for taking on this risk. Sure, very timely question, because right at this

point in time, certainly investors are demanding more return. There's been a particularly difficult number of years for the global reinsurance market as a whole. And whenever the reinsurance market has significant losses from severe weather or catastrophes, than the I L S market will take a share because it is providing a significant proportion of the capital these days.

So since obviously we had a severe hurricane season that year, we've had wildfires, floods, more hurricanes, some earthquakes, a number of other other events, and there have been losses. And now the losses haven't been enough to significantly damp and investor demand until you start to get repeat years. And and actually we have seen a decline in investor demand through this year, but that's also happened at exactly the same time as we've had had some financial market pressures.

Obviously there's the war Russia's war in Ukraine going on, and then you've got inflation as well, and all of this has kind of come home to roost in one single year for the insurance market, and as a result, we see reinsurance rates and pricing going up, and in tandem, rates for insurance link securities are going up as well, because insurance line securities are essentially largely providing capital either to an insurance or reinsurance arrangement, and so the pricing

kind of follows the pricing of the traditional insurance and reinsurance market to a degree. Now, there are some capital efficiencies in terms of being able to tap diversifying sources, being able to distribute risk into an enormous market such as the capital markets as well, which can give some

sort of capital efficiencies as well. But then there are additional costs sometimes with issuing insurance lin securities because they are financial securitization structures and so they do have additional

cost attached to them sometimes as well. But the pricing does sort of tend to follow traditional reinsurance and I guess the one thing that everybody in the insurance industry will always point to when it is particularly when it comes to climate sort of variability and climate change and how the risk might be changing over time, is that typically these are transactions on the traditional reinsurance side, they

might be one year to three year. On the insurance link security side, they might be sort of two to five years and tenure, So you are getting a chance to reprice that risk now. Within an insurance link securities transaction, there's also what's called an annual reset as well, where a sponsor can adjust the profile of risk that's covered

in the transaction. But at the same time, the metrics that are used to calculate the coupon payment for the investors also get adjusted as well, So as the risk changes, you get a chance to reprice the risk when you either renew a contract or you reset a contract. And so the idea is, in an ideal world, the pricing

would keep up with the changes. Now when the whole industry feels like perhaps it's been sort of underpricing for a little while, which I think is something that most of the industry would recognize that we had some particularly big sort of inflows of capital. We also had some particularly benine years in terms of catastrophes through the tens, right up to seventeen when suddenly the hurricane season exploded and we had three major storms all in a row.

And I think now it's taken a few years for it to sort of sink in that there really is a need for for higher pricing. Alongside that, without a doubt, there appears to be changes in sort of frequency of

events and potentially severity as well. But also some climate scientists would say that the the overall sort of the way a hurricane exhibits its damage might have changed or might be set to change with climate change as well, in terms of potentially carrying more water, potentially storms getting bigger,

that sort of thing. So there's a lot of money spent on both the traditional cap catastrophe models that the industry is used now for about thirty years or so, but also increasingly on climate models and climate simulations as well, where people are trying to look ahead twenty to forty years to try and see how the impact of storms such as hurricanes might change over us a broader period

of time. And really there's there's just a lot more research nowadays with better technology being available as well, to try and help people to price risk better but also to perhaps ensure that the pricing is more sustainable over a longer period of time as well. Yeah, I want to just talk further about that because I guess, like you know, part of the appeal of investing in this

space is that there's just gonna be some randomness. We talked about this sort of lightly correlated market, and you might have a year or two a very extreme hurricane, and then you might have years and years where Florida and other major property areas really don't get hit much at all. But I would imagine that if there is a sort of significant climate change element to this, that perhaps some of this randomness could go away, or that you know, could get worse and worse in some sort

of maybe predictable trajectory. Can you talk a little bit more about the sort of intersection of sort of extreme weather risk with the climate modeling that you're talking about and how it changes the industry If there's a perception that some of these things aren't random and that there are trends that are going to sustain themselves for years to come, that's that's actually quite a difficult question to answer, to be honest with you, without talking to the to

the people with the money or the underwriters on the ground. But I guess mors months to that would be that the industry is certainly looking far ahead now in terms of the research and analysis that they're doing, and they're really trying to understand where the trajectory of events is going, but it can be very difficult to pinpoint that in any exact way. And Tracy began this by saying that

this year's hurricane season was a little strange. Now, some of the forecasts in advance of the hurricane season from the main meteorological agencies were predicting huge numbers of storms, and we just didn't see that. So you really can't go out and buy your protection based on a forecast. You've got to look at sort of recent history plus factor in your forward looking climate science and try and come up with something reasonable for the next season or

two seasons or three seasons. Now, I'm sure at a the CFO level of the big insurance companies they're thinking much further ahead and wondering how they're going to adjust their pricing to accommodate the ential climate of the future.

But I think on the sort of underwriting side, the people who are sort of analyzing underwriting and then pricing these risks, they're thinking about the duration of the contract and what could happen within that period of time, and there's other factors out there that have really been as damaging in some ways in terms of losses as the events themselves in some cases, and I'm thinking here about elements like social inflation litigation alongside inflated prices and how

that that is affecting property, sort of rebuild costs and things like that. There's a lot been going on over the last five years, which is all sort of coincided with a particularly challenging period of catastrophe activity as well, and when hurricanes have hit Florida and the industry has been hit by what we tend to call loss creep, A lot of that lost creep has ended up to

be down to litigation. There's a lot of people who would call some of that lidication at least to be driven by fraud, and that really has inflated some of the claims payments that insurers make, which results in insurers claiming more back from their reinsurers and would even result in some insurance link securities potentially paying out in return

for inflated loss costs that come through. Maybe this is a good time to ask you about parametric insurance as well, because this is something you know, I've written a little bit about cat bonds in the past, and the World banks pandemic bonds. But parametric insurance is something that I've seen come up increasingly in recent years, but I don't actually have any idea what it means. So what is

that exactly? Sure? So essentially, insurance is usually what we call an indemnity based product, where it's it's a it's a it's a promise to make somebody whole again when something happens that meets the terms of the contract, and the making whole is subject to certain certain exclusions and things like that, as with any insurance contract. Might be that that works really well obviously for for your average

insurance consumer. It also works well for insurers buying reinsurance as well, and they will do that on an indemnity basis as well. Parametrics really came into the industry as well over two decades ago when we first saw saw them come come into the marketplace, and they're basically an insurance contract that will trigger based on the parameter of

an event. So it's some kind of data input, be that windspeed, earthquake intensity, ground movement from an earthquake, flood depth, temperature that there's so many different triggers out there now in the parametric world. These are much more applicable in developing economies because there's often a lack of ensurable interest on the ground, so there may not be very much

insurance in force. But a sovereign government, for example, could buy drought protection that pays out based on a parametric index of how much moisture has fallen in that year in that country, and that that's now quite a popular

product in places like Africa. But there's people in Florida, Florida on the coast who will buy parametric protection to cover their condos or their hotels or golf courses or whatever they may be against a hurricane of a certain windspeed moving through a specific area of the coastline that's going to be close to where they're based. For me, parametrics are something that i'd love to see continue to develop at the pace they're now beginning to, because it's

really accelerat did over the last few years. There's some really good technology companies come into the space trying to build better parametric triggers, trying to build software for it, trying to automate claims payments to some degree as well. Because that's the other beauty of a parametric trigger that there's no need for a lengthy claims assessment. You don't have to send an adjuster out to look at a property, for example, to assess how much damage has been done.

You can just see from the data inputs that it's above the level that is required to trigger the contract and trigger a pay out, and then there's usually a third party will validate that in some way, so claims payments can be as quick as I mean they're they're usually in the sort of two to four week range, but I've seen them made in twenty four hours for certain parametric contracts, which is really fantastic because it means you can make somebody not whole because they're buying a

certain amount of protection, but you can certainly deliver the capital they may need to help them recover far far more quickly. It does seem like the triggers for the payouts on parametric insurance products. So I understand you're trying to make specific parameters or data points that get that get hit by an event so that you have these automatic payouts, but it does seem like getting the triggers

right like would still be an issue. Right, because the investors would want to see something that they think isn't likely to happen, and then the people who are actually selling those products would want to have them set so that there is a realistic chance that if something happens, they would get that additional money. I don't know, it just seems like it would like it would be slightly

complicated to figure those out. It's certainly complicated, and I think this is an era that the industry struggled with for for a while. When parametrics first came around, they tended to be quite simplistic in the way the triggers were structured. One of my favorites was took Disneyland the theme park water, don't we all. They actually bought a

catastrophe bond back in the late nineties. I can't remember the exact year, but it was called Concentric Limited, and the reason it was called concentric was that the people who structured the deal drew three circles around the center of Tokyo Disneyland, and if an earthquake occurred within those three concentric circles that worked out from Disneyland, you'd get a different payout depending on which circle it fell in. Now, of course, if the earthquake epicenter was outside the furthest

circle could still be some damage. They may not get any pay out at all, of course, but that's really something that the buyer of the protection, I guess has to has to reconcile with themselves. And really they're buying this as kind of a form of just in time capital that's going to come in when the worst thing

possible happens. There's some really sophisticated insurance buyers out they're now who buy parametric cover as well, and they'll buy their traditional property insurance tower all of their other liability and commercial coverages, and then they'll buy some elements of parametric cover just really to provide them with capital inflows should the really bad events that they don't want to

see happen occur. There's some good examples of this in Japan again, where around earthquake risk retailers and things like that will be buying an element of earthquake parametric insurance protection so that if there's a bad earthquake anywhere in the country, they know it's probably going to mean that they either can't get their stock in, they can't open, they lose power all these bad things could happen to them, but the parametric insurance might pay them million dollars in

a very quick period of time to help them recover. It's also very good in areas such as the developing world, where aid inflows can actually be much slower than we might think. I mean, when you when you look at how fast aid flows into an area that has drought or famine, it can take months before there's any real build up of capital. If their government can afford to buy or can get donors to pay the premiums for parametric protection, that can actually flow into the country much

more quickly. You mentioned drought in Africa. We started talking about this conversation that some of the things we've talked about drought in the US, particularly with the Mississippi River, and then also elevated water levels due to heat waves, which are a really big story in Europe over the past summer, and we had some episodes where we talked about the fact that that is having on say nuclear plants that need the cool water from the river so

that they can dump the hot water safely. Are those types of things also insured against in some way, like are there products structured around all of these risks or would something like that be too niche really to have

a financial infrastructure around it. Sure the river the one is a very good example because there actually have been some parametric insurance products covering the River Rhine for specifically to for the ability of shipping companies to continue moving up and down the river easily and delivering their their goods. I don't know whether they triggered or not, but I know that the river levels did get very close to

where I understand the triggers to be last year. I don't imagine there's a huge amount of capacity deployed into those sorts of risks. They are quite niche, but certainly they can now be protected against something can be structured to do exactly that. On the nuclear power plants issue, again, if it's based on river levels, then there certainly are people out there providing insurance on that basis already today.

I think we're parametrics get really interesting for the future for me or around what we call non damage business interruption. So this is where something happens that impacts businesses and it's not a physical damage incident, but there's something that has a knock on effect. If you can start to put some understanding around those potential events that could cause those effects, then you can possibly start to put parametric

triggers around them as well. And there are some people looking at this quite seriously right now, both around sort of financial effects that could affect businesses, but also the knock on effects of other events in the world that could hurt businesses, so things that cause shipping delays, for example. There are certainly companies out there looking at those sorts

of risks as well. I want to ask a sort of existential question about this entire space, which is obviously, as we get more extreme weather related events, more natural catastrophes, you could see why people would want to have this kind of insurance in place. But on the other hand, one of the criticisms I've seen of catastrophe bonds, and I guess this would extend to parametric insurance as well.

One of the criticisms is that if you are offering more protection against extreme weather, then maybe that will disincentivize people from planning effectively for climate change or maybe changing

their own behavior. The classic example of this is whether or not we should be providing insurance for people to build beach houses on the coast of Florida, right, or whether we should not offer insurance for that risk because we know that climate change is going to happen and those houses are going to get swept away at some point. Is that a valid criticism in your opinion? Um? Is

it a valid criticism? I mean, the insurance industries provided protection to industries that perhaps some of us would certainly think nowadays maybe shouldn't have ever had that protection because it's enabled their business is to some degree, I suppose, and that's really been the way of the insurance industry, that they will sell protection to people for the right price. But it actually now speaks to a couple of things that are happening in the industry which I'm particularly passionate about.

One is around resilience. So there are a number of initiatives around the world. Again, these are largely in developing economies at the moment, but I think we'll start to see this and actually we are seeing this increasingly in developed world as well, but in a slightly different way. And this is around the terms of your insurance coverage also requiring you to do something that's going to increase

your resilience to those events as well. So whether that's a you need to have a resilience plan in place, you need to have a plan for how you're going to deploy that money should the insurance pay out, and you need to demonstrate that that's going to go to the right people, particularly in the case of sovereign risk transfer,

where a government or country is buying it. But alongside that there's also a sort of examples where people are being encouraged to put in place things that will help them to keep floodwaters out of their property, for example, and that can be tied into an insurance sale. Cyber risk is another interesting area because the cyber insurance market

is growing very fast. It has capacity issues because obviously it's an enormous risk that's actually quite hard to model in a lot of ways, so there's only a certain number of people who really want to put capital down for that. But most of the sort of the big large commercial cyber insurance agreements of the world will have an element of cyber risk protection into them as well.

They'll be cyber software, there'll be cyber security reviews, there will be penetration testing, all sorts of things that go on as you buy your cyber insurance policy. And some of them may be conditional on whether you can actually buy that policy or not. If you're not willing to demonstrate that you're making some efforts to prevent cyber a sort of exploits occur within your business, you may find it harder or you may pay more for your cyber

insurance protection. So I just have one more question, and it relates to climate change, and it also sort of relates to E. S G and government regulations because you know, I feel like, Okay, if I'm thinking about ensuring against hurricanes or flood risk in Florida, then I might be concerned about climate risk and whether that's going to amplify the number of highly destructive hurricanes in the future, and

I have to model that out. But then the other thing I feel like that is always changing is not just the hurricanes itself, but how are the laws going to change and how are regulations going to change, and so essentially the risk of a different legal framework or you know, we just had the latest climate conference in Egypt and some new rule that comes out of that, and so you know, not necessarily the extreme weather itself, but that government say to some industry you can't do

is or you can do that, or you have to price this higher, you have to pay this tax, or something like that. How much of like the thinking is related to the straightforward risk of extreme weather as opposed to sort of like various mandates that may change the nature of business going forward as a result of government trying to take action on climate change. That's a very

interesting question. Obviously, there's a lot going on in the climate sort of legislative arena at the moment, and insurers are kind of exposed to that to a degree, I suppose. I guess it's another input that really needs to be a difficult to model for, but needs to be considered when they model in price their their business. And the other thing is that the insurance and reinsurance industry are incredibly engaged in most of those discussions where they can

be as well. And and certainly there's some areas that the insurance and reinsurance industry might actually see potential future rock tunity coming from, such as climate disclosure. So if the so for example, the Fortune five companies and the largest businesses in the world all have to start to disclose their weather exposure on their balance sheets or something,

because that comes out of a cop conference. Obviously, if you start to disclose that kind of thing and your shareholders are seeing these potential big negative numbers on your balance sheet, even if they don't manifest, it's still something that really any sensible business owners should be taking steps to protect against. So there's also potentially going to be more demand that comes out of climate legislation as well,

I mean demand for risk transfer and insurance itself. So we've been focused on the weather and climate change for obvious reasons. But there's another thing happening which has an impact on the insurance industry as a whole, and that is just higher benchmark interest rates in general. Can you maybe talk a little bit about what that means for

the insurance and the reinsurance market. And I guess the other big question would be, given the combination of we have this expectation that there will be more extreme natural disasters in the future, plus interest rates seem to be trending higher for the foreseeable future, does that just inevitably mean that insurance rates are going to have to go up? Like?

Is that our inevitable future? I mean, what while inflation remains at ten percent than than just the cost of everything that potentially gets damaged is going up significantly from property to everything that you own, and as a result, insurance costs will go up to cover those those items that we all love and want to want to keep.

But I guess I've going back to the start of your question there the interest rate aspect, there's certainly a negative initial effect on insurance and reinsurance industry in terms of how it affects some of their portfolios of assets

on the bond side. That has caused some sort of decline in in industry capital due to some of the volatility we've seen in financial markets so through this year so far, but most of that will would be expected to be recovered as obviously the instruments all moved towards

maturity and yields increase on them. Again, in the insurance and security space, interest rates are very relevant there as well, because a catastrophe bond, the return that investor gets is based on the coupon, which is the risk spread, so how much they're getting paid for the risk they're taking on.

But then there's also the return from the collateral because these are fully collateralized instruments, so a hundred percent of the collateral is usually invested in something like a treasury money market bond or something like that, so it's a very safe asset. Now all of those assets are floating up with rising interest rates, which means the the returns

from catastrophe bonds rise on top of it. And so that's maybe a positive for the investors there and also something that keeps the insurance of securities markets are still appealing, even while other asset classes around the world are obviously inflating their returns as well. The question of does insurance have to keep rising, I mean, I think I think that's the inflationary factor really there, and it's certainly something that right now that's one of the key drivers for rates.

And we're expecting next year well that the January renewals, which is the time of year when sort of global reinsurance gets renewed, they're going to see of what we would call a hard market, so steeply increasing rates. People are projecting sort of anything up to increases, particularly for property catastrophe risks. More broadly in areas like liability, there will still be increases, it seems like, even though there

hasn't been the severe loss experience there. But then inflation obviously affects things like court judgment payouts and litigation costs, and so I would imagine that the more inflation is entrenched, the more costs for the insurance industry rise, and therefore the more customers would have to pay for it as a result. Alright, Steve Evans, thank you so much for coming on odd Lots. I'm glad we could finally have

this conversation. You know, we've covered weather from a real economy perspective, but we haven't actually done it from a sort of financial industry perspective. So thank you so much. Sure, it's my pleasure, really great talking both, and I hope that was interesting. Yeah, very much, thank you so much. Thanks Jed, Thanks Tracy, so Joe. I found that conversation

to be fascinating. I do think, like I guess, I come out of it with with more questions, because it does seem like, you know, there is really this there's always this tension in insurance between paying enough that investors want to take on this risk without making it sort of prohibitive lee expensive. But then also when it comes to a lot of the catastrophe bonds and weather related insurance, it seems like there is this added factor of should

we be ensuring some of these risks at all? You know, I say, if people want to pay for the insurance, let people build on the Florida coast. You know. It's like I don't think it should be like subsidized or it should be free, but you know, if the people

want to pay for it, that's great. Well there's also the question, and we didn't get into this with Steve, but you have seen a lot of governments and states issuing catastrophe bonds selling those to private investors, and it does cut This is something that I vaguely remember came

up with the World Bank pandemic bonds as well. But it does beg the question of should the government be paying investors, you know, like a well, it's not that impressive anymore, but three or four years ago it was impressive a six percent yield on a bond instead of

just borrowing themselves directly in the market. Yeah, we need to do a whole thing on like municipal finance because I have like, once you started getting the question of like well why is there like the specific bonds and why they then yes, maybe we could do a sort of govern a state and local government financing episodes because I have a million questions about that. You know, there were all kind of you know, in terms of um

things that st you have talked about. I want to do more on like software and just like modeling software, and the software comes up in a lot of our conversations. There's that also, it comes up in the semiconductor of conversations that we have. So I feel like I want to learn more about the software side of all this. We should talk to A I R, which are the big modeling guys a lot of cat bonds, and then we should also talk to on a related note, we

should talk to the third party pricing services for bonds. Yeah, no one ever talks about them. Okay, So this is an episode in which like we've come away with what three more episodes that we need to do at least three more, and you know, just on the one thing that I keep coming back to is like, Okay, if you have like insurance, on some level, you sort of

expected to be mean reverting. You sort of expect things to be random, these sort of like undiversifiable risks that you need these big pools of capital out there to protect you against. But I do wonder, you know, if there if there are certain areas particularly related to climate change, in which the expectation is that there is some sort of extreme weather event that is going to march steadily worse and worse over time, that there's no natural mean reversion,

that there is less chaos and randomness. It doesn't make me wonder like the degree to which some of these industries will be up ended totally. And there are all sorts of philosophical questions thrown up by this as well, which is of course, insurance can be a really effective way of actually altering behavior like maybe you shouldn't build houses on a beach in Florida, and whether or not they're gonna be partnering maybe with governments. Interesting, Yeah, to

try to, um, you know, affect some of that fascinating conversation. Yeah, I'm glad we finally had it. Shall we leave it there? Let's leave it there? All right? This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't All? You can follow me on Twitter at the Stalwart. Follow our guest Steve Evans he's at Steve underscore E. Follow our producers Carmen Rodriguez at Kerman

Armand and Dash Bennett at dashbot. And follow all of the Bloomberg podcasts under the handle at podcasts and for more odd Lots content, go to Bloomberg dot com slash odd Lots, where we post transcripts, Tracy and I blog. We also have a weekly newsletter that you can subscribe to. And on that note, we're gonna be doing and Ask Me Anything episode where you can ask me and Tracy

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