Why invest in ILS funds?
Insurance-linked securities (ILS) funds are now available in a wide-range of risk-return profiles and strategies.
These can range from pure cat bond funds, that only invest in catastrophe bonds and can have return targets as small as the low single-digits, to higher-risk and reward reinsurance and retrocession focused ILS fund strategies that can have return-targets into the double-digits.
Reasons investors might choose to allocate to ILS funds include:
- Diversification benefits: As an asset class that generally exhibits very low-to-zero correlation to broader economic factors and financial markets or other assets, insurance-linked securities (ILS) can be one of the most diversifying return-drivers an investor can add to their portfolio. ILS returns are not linked to the economic cycle and can provide low-volatility returns, when compared to some financial indices.
- Potential for high returns: ILS funds come in a range of risk and return profiles, but generally they can target returns at mid single-digits into the double-digits, while cat bond funds can start at lower return levels.
- Access to reinsurance market returns: ILS funds can offer an alternative route to generate income from the global insurance and reinsurance market, through direct investments into the risk rather than the more correlated corporate structure investments provided by equities.
- Professional management: ILS funds are managed by experienced professionals with expertise in the reinsurance and insurance-linked securities (ILS) markets.
- Liquidity: Some ILS funds, typically those with catastrophe bond investments, can offer a reasonable level of liquidity to investors. However, many ILS fund strategies that are more focused on reinsurance and retrocession investments could have longer lock-up periods.
- ESG: There can be environmental, social and governance (ESG) related motivation for investing into ILS funds, especially those focused on natural catastrophe related risks. ILS and catastrophe bonds are seen as assets that provide disaster risk financing and recovery funding, hence are aligned with certain of the SDG’s and many investors will view the ILS asset class positively, through an ESG lens.
There is a particularly wide-range of ILS fund strategies on offer nowadays, making it important that investors do their research and understand the different offerings, to find an ILS manager that provides the levels of risk and return being sought and that has the expertise and strength of team to deliver on it.