ILS, cat bonds & reinsurance, an asset class to offset a crisis

by Artemis on May 18, 2015

There’s a new strategic asset class in town, the Crisis Risk Offset (CRO), a select group of assets that could provide returns and liquidity during an economic growth crisis, and one of the assets considered able to offset a crisis for investors is ILS and reinsurance.

According to a study undertaken by investment consultancy Pension Consulting Alliance (PCA), the Crisis Risk Offset could make up a valuable component of large institutional investor portfolios, such as those managed by pension funds.

The value in having a percentage of your assets allocated to investments that exhibit a low-level of correlation with wider economic cycles is clear. In a time of crisis, when many mainstream asset classes are negative or worse still plunging in value, assets that can provide return in a time of crisis could prove extremely valuable.

In its work for the California-based $2.5 billion San Joaquin County Employees’ Retirement Association pension fund, PCA has recommended that a new asset class, CRO, would provide return in times of crisis. The underlying strategies might include assets such as liquid alternatives, risk premium, discretionary global macro, Treasury rate duration, put buying and reinsurance, reports Pensions & Investments.

Catastrophe bonds, insurance-linked securities (ILS) and investments in collateralized reinsurance structures could certainly fit into a crisis risk offset asset bucket. All would likely continue to provide valuable returns in crisis times when broader economic metrics may be suffering. Some would also provide liquidity, in fact cat bonds and 144a securitisations of reinsurance risk could be a perfect return and liquidity source during an economic growth crisis.

It’s interesting to hear how investment market participants value assets which display low levels of correlation, such as ILS and cat bonds. For some investors this can be so important to the way they apply portfolio theory that they will apply some sort of additional weighting to assets that display a low correlation with the rest of their portfolio.

As ILS, cat bonds and insurance or reinsurance linked investing grows in popularity and becomes more widely accepted, we’re likely to hear that different investors consider the asset class in differing ways.

Using ILS or reinsurance as a crisis offset asset class is really akin to an offensive form of defence. Ensuring you always have something in your portfolio that will keep providing a return for you, when the rest of the assets you hold have run out of steam.

Also read:

As asset class correlations rise, attraction to ILS & cat bonds increases.

In a low-yield world investors should look to re/insurance: Twelve Capital.

Equity investing can be as risky as catastrophe reinsurance investing.

Liquid alternative allocations to grow, cat bonds & ILS will benefit.

Catastrophe bond ‘appraisal ratio’ highlights portfolio benefits.

On the non-correlation, or otherwise, of catastrophe bonds. And drooling.

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