A standardised method for reporting risks in the ILS industry is a “very likely outcome” that many institutional investors would welcome. The process is expected to be lengthy and complex, but the industry should seize the opportunity to take important and achievable steps towards this goal, according to Entropics Asset Management AB.
Citing a recent Artemis publication regarding the benefit of standardised and comprehensive reporting of insurance-linked securities (ILS) investments for investors, Entropics has expanded on the topic and offered some thoughts on what the market could be doing to develop such a methodology.
“Many of the people in the ILS industry I talk to seem to agree that a standardised method for assessing and reporting risks is highly desirable. While this is eventually a very likely outcome, it is obvious that it will take considerable time to achieve. It is thus important that we find substantial intermediate steps,” said Entropics Chief Executive Officer (CEO), Robert Lindblom.
The topic seems to be growing in prominence, and was discussed by a number of industry experts during the investor panel at the 2016 ILS Convergence – Bermuda conference held in November 2016. Speakers noted the benefits of standardised reporting, and like Lindblom noted a desire amongst the investor-base for this to happen and be a component of the ILS space moving forward.
“We also know that some institutional clients have started to ask for increased standardisation and comparability of risk figures. The industry should see this as an opportunity to address investor concerns before they become real concerns,” said Lindblom.
Lindblom suggests that it will likely take some time before a standardised methodology for reporting is established in the ILS industry, but with instruments such as catastrophe bonds there are certain measure that could be explored in the immediate future.
Differences in the reporting of cat bonds can be down to the utilisation of different modifiers within software solutions provided by leading risk modelling firms that the ILS space uses, explains Lindblom. But the issue could be “handily addressed.”
One such way would be to report risk metrics offered by such software but using unmodified settings, and to disclose which modifications are actually used when producing reports. “While this would not produce comparable figures, it would provide investors with an intelligible explanation of differences between different reporting formats,” explains Lindblom.
Taking over catastrophe bonds as the largest segment of the ILS industry, collateralised reinsurance deals, and their utilisation of proprietary models to report risks, presents an even greater challenge, explains Lindblom.
“But there are things that could be done before having a comprehensive risk reporting standard in place. One such thing could be to separate the reporting for portfolio risks that are calculated using independent software from the risks that are calculated using proprietary methods,” he said.
As an example of steps taken by Entropics, Linblom’s article states that the firm doesn’t mix risks that are derived from various settings and software within the same reporting.
“But a portfolio can certainly hold and report both types of instruments, provided that not only an aggregate risk is reported, but also enough information on how this aggregate is calculated based on underlying otherwise incommensurable risks,” he added.
In the overall alternative investment space, the creation of the now titled Alternative Investment Management Association (AIMA) played a vital role in expanding the reach and appeal of alternative investments, explains Lindblom. And efforts by the entity to improve standardised DDQs, for example, provided investor comfort and greatly contributed to the success of the market. Something that Lindblom feels could also “inspire the ILS industry.”
The demand for more standardised reporting methodology is apparent among the investor base and the ILS funds and managers themselves, so it’s very plausible that one day this will be the case. But such things can be complex and lengthy, but as stressed by Lindblom, that doesn’t mean there aren’t certain measures the ILS space can take to support the transition and help the process along.
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