This interview with Vincent Prabis Head of ILS Strategies at reinsurer SCOR’s Global Investments unit, discusses what it’s like to operate an insurance-linked securities (ILS) unit within a major global reinsurance firm.
This interview, fully titled ‘Advantages of working with an insurance-linked securities manager within a reinsurer‘ is taken from the recently published report by specialist financial services, pensions and investments publisher Clear Path Analysis, titled ‘Insurance-Linked Securities for Institutional Investors 2014.’ Clear Path Analysis have kindly allowed Artemis to republish it here in full.
– Vincent Prabis, Head of ILS Strategies, SCOR Global Investments.
– Jessica McGhie, Senior Publisher, Clear Path Analysis.
Jessica McGhie: How does SCOR Global Investments’ risk appetite differs from the insurance-linked securities (ILS) pioneers and what benefits can this bring to the end investor looking for diversified, uncorrelated returns?
Vincent Prabis: As a traditional reinsurance company SCOR understands the ILS market very well as it has been an issuer of catastrophe (CAT) bonds since 1999, and in addition, has issued a sidecar last year and has been buying fully collateralised retrocession for its own coverage for many years as well.
SCOR wanted to offer investors access to the space under its own brand name. We wanted to take a different approach than the ILS pioneers who only had CAT bonds at their disposal during the initial phase of development of the ILS space from around 2001/2002 until about 5 years ago. At that time, investors often accepted a high concentration of risk in the peak peril/ regions. As a traditional reinsurer and sponsor of an ILS fund, this is what SCOR wanted to avoid and so it had to wait for the space to deepen and for other products to become available until funds could be launched.
Over the last 5 years, specific mechanisms allowing funds to access other contracts such as industry loss warranties and reinsurance and retrocession contracts on a collateralised basis have become available. Only once these were available were SCOR able to create portfolios that were diversified and this is what we have been doing since 2011.
What differentiates us from the ILS pioneers is that, like a traditional reinsurance company, we always aim to have a portfolio as diversified as possible and do not feel that an investor’s diversification in other uncorrelated asset classes is enough. As we emulate the DNA of a reinsurance company, diversification is offered across all funds. Certainly we offer different risk appetites and different liquidity options, but across all funds, we always keep a diversified approach.
Jessica: Although you have different risk appetites is it fair to say that your product is better suited to the more cautious investors?
Vincent: Certainly, and I would add that we are looking for partners rather than investors. As a reinsurance company, when presenting the asset class to potential partners, we clearly explain to them the inner working of the space and in particular its cyclical nature. We insist on the fact that there will be natural catastrophes which will generate draw-downs in the portfolios and describe the ensuing hard market. In doing so, we make sure that we align ourselves with like-minded investors, and ensure that their investment horizon is adequate for the space.
For ILS we are talking about a mid to long-term time horizon of 5 to 6 years depending on the strategy. It is vital that they understand that to benefit from this asset class, they will need to be invested throughout the entire cycle.
Jessica: How do you structure your portfolios accordingly and how conservative would you describe them to be?
Vincent: I wouldn’t use the word conservative as ultimately we are risk takers. However, we are conservative with respect to the diversification of the portfolios and the fairly high investment constraints imposed on them. Our everyday job is to ensure that every deal is well remunerated on a standalone basis and that the portfolio we construct is diversified enough. We are not reinventing the space and if we have to participate in the CAT bond market itself, any diversification will remain very much geographical. To find additional diversification, we participate significantly in aggregate contracts, and in second and third events cover that provide added differentiation to a pure “per-occurrence” portfolio. Certainly I wouldn’t describe our strategies as conservative but it’s fair to say that we are more conservative than other participants in the space.
Jessica: What practical advantages in terms of regulatory compliance, geographical reach and risk management can you deliver?
Vincent: As a SCOR sponsored ILS fund we obviously benefit from the reputation of a large Continental European institutional reinsurer, but we also benefit from its infrastructure. Our risk management is completely independent, as well as the internal compliance function, as SCOR Global Investments is regulated by the AMF (Autorité des Marchés Financiers), the French regulator. Practically, we are an onshore asset manager, which is important for many of the investors we meet that are not always comfortable with the fact that our industry, insurance and reinsurance as a whole, tends to be offshore in places like Bermuda or the Cayman Islands. It’s been reassuring for our partners to know that they have met with a publicly listed, large Continental European reinsurance company.
That said, we are completely separate from the underwriting team of SCOR and don’t benefit from their analyses nor have access to their tools. We don’t know what they see, what they quote and ultimately what their portfolio actually looks like. To some extent we are a competing form of capacity. Nevertheless we are able to leverage their CAT modelling tools.
We have access through service level agreements within the company to all of the CAT modelling tools that SCOR is using and also to their legal team.
Jessica: Jumping back to the risk management side, is that a very blanket approach or can it be varied and tailored according to the different investors you’re working with?
Vincent: We currently manage 4 funds, and only one is a managed account. In that case we have tailored our strategy according to the needs of this unique partner. As we are a publically traded company we are very comfortable providing full transparency on the portfolio we created for them. In general, we are quite happy to talk with investors and develop strategies that will meet their liquidity constraints and target yield as long as they understand the nature of the underlying asset class.
Jessica: You touched on how SCOR Global Investments sits within its reinsurance holding company but have you anything to add on how you work with the wider company to appropriately source and market your offering?
Vincent: When we source business, we do so as an independent team. We have been greatly helped by the broking community over the last couple of years as a result of being sponsored by SCOR. These organisations know the importance of our funds to the senior management of SCOR and have been an important help to our development. The fact that we are offering ILS capacity with the SCOR logo means a lot in the long-term for cedants, especially over new, unknown to the market, capital capacity providers. Brokers do understand this, that well.
Jessica: Do you plan to expand the ILS instruments you offer?
Vincent: Given that portfolio diversification is so important to us, when we find well remunerated deals on a standalone basis, we are always looking to offer access to more lines of businesses. When we developed our initial strategies, we didn’t limit ourselves to CAT bonds but of course, the obvious limitation for us is the short tail nature of the contracts we can enter into. I hope that going forward we will be able to increase our access to those other areas, but for the time being we’re probably going to need to stay focussed on the CAT business.
Jessica: Of the ILS instruments presently out there, which ones capture your attention the most in terms of aiding the market’s future long growth?
Vincent: Each instrument has its own advantages and inconveniences and therefore, it’s important to participate on all segments. The market tends to favour CAT bonds because they provide the liquidity sometimes needed in the portfolio.
However, here at SCOR Global Investments we don’t favour one particular product and will continue to pick and choose from the market as it develops.
Jessica: Thank you Vincent.
Read our other articles and transcripts taken from this report:
– Institutional investor appetite for insurance linked assets remains strong.
– Roundtable: What are the challenges of evolving insurance-linked securities structures?
– Roundtable: What is the future for insurance-linked securities?
– Interview: Tony Rettino on building a sustainable reinsurance model.
– Roundtable: Achieving optimum diversification in ILS investing.
– Interview: Dr. Erwann O. Michel-Kerjan of The Wharton School on ILS risk spreads.
– Interview: Andrew Mawdsley, Head of Financial Stability, EIOPA.
The report from Clear Path Analysis is available to download today.
Visit the Clear Path Analysis website to register to download a full copy of the report ‘Insurance-Linked Securities for Institutional Investors 2014‘ including all of the interviews and roundtables.
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