What Family Offices Must Know About Investing in Insurance-Linked Securities

Contributed by Marcus Evans, 26 November, 2014

"As an asset class, insurance-linked securities (ILS) have successfully withstood the financial turbulence of recent years, attracting investors with a track record of healthy, uncorrelated returns as well as a growing range of investment opportunities. Understanding the asset class is critical to capturing good performance, investors must therefore partner with the right manager to generate favourable returns over the long term," explains Michael Jedraszak, Director of Insurance Linked Securities, Kiskadee Investment Managers, a subsidiary of specialist re/insurer Hiscox Re.

How does ILS compare with other asset classes?

ILS has been around for over 20 years and its performance has been tested not only through actual catastrophic events but also financial crises. From an informed market participant's point of view, ILS is considered to be a well understood, measured risk which helps explain why the investor base has expanded far beyond hedge funds to family offices and pension funds.  

These days when selecting the right ILS manager investors should look forward to who will perform well over the next decade, not necessarily to those who may have performed well in the past. In the current fast-evolving market, very different investment structures and skill sets are required, as ILS managers have to adapt and develop more intelligent ways to generate favourable returns.

What should investors look for in their ILS managers?

It is key to consider whether an ILS manager has demonstrable access to the full universe of risks available. This is critical, as over 90 percent of the catastrophe space is traded privately with no secondary market available. Having the best portfolio analysis tools and catastrophe models is pointless if a manager lacks the ability to originate risk.

A manager must also have the skills to select the right risk. As a Hurricane Katrina or a San Francisco earthquake does not happen every year, the opportunities to learn by gathering data points or to showcase the efficacy of the product are rare. Participating in the market for private catastrophe transactions for 20 or 30 years does therefore make a difference.

Finally, selecting an ILS manager with the ability to put skills into action through a global footprint to access geographically dispersed catastrophe risk is also critical. In this industry, diversification is how investors can achieve balance, profitability and adequate portfolio returns.

What trends should private wealth managers get clients ready for? How?

Climate change often comes up as a topic, but if managed properly, it can only be good for this space as it creates more transaction volumes. We manage this risk by selling short duration transactions of typically one year, which means we can respond to change and new science quickly.

In the past two to three years, a key change has been the increased availability of capital for ILS. This trend has underscored the importance of selecting a manager who can source the right quality risk. Until a few years ago, most structures were fairly standardised as capital was in short supply. Certain investors have not spotted this sea change and continue allocating capital to managers who are tied to a certain outdated strategy or operating methodology. The only way such managers can originate transactions is by significantly under-pricing the risks they take. Many managers struggle with limited access to good risks, therefore finding managers who have the proven risk sourcing capabilities to generate the satisfactory yield and risk is key.

Interview by Sarin Kouyoumdjian-Gurunlian, Press Manager, marcus evans

For more information on the Elite Summit, please contact Laurel Zevitz at l.zevitz@marcusevansch.com

Tags: Investment | Invest | Investment | Insurance | hedge funds | investment | insurance | trade |



Articles Archive