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Original Risk: A Society for Change Agents

ILS can be a socially & environmentally responsible investment: Experts


The argument for responsible investment (RI) in insurance-linked securities (ILS) can be seen in both society, with the benefits of insurance protection, and environmental benefits, such as building financial resilience to climate change, argue ILS market experts as part of a recent roundtable discussion.

As an asset class ILS and catastrophe bonds have been discussed in the past as increasingly able to provide investors with a new form of responsible investment. The remit of the marketplace has expanded in recent times, and once again ILS experts have debated the appropriateness of ILS as a responsible investment.

As part of a roundtable discussion with Clear Path Analysis, Mercer Investments’ Robert Howie, Nephila Advisors’ Barney Schauble, and Alex Bernhardt, also of Mercer Investments, discussed ILS as a responsible investment (RI).

“There are two areas where you can make the argument for RI in ILS. One is the fact that insurance in itself is seen as beneficial to society,” said Robert Howie, Principal, Mercer Investments.

“In addition to clear social benefits, ILS also has the ability to support the financial resilience of individuals, businesses and governments in the face of climate change,” added Alex Bernhardt, Head of Responsible Investment, Mercer Investments.

Individuals, businesses, regions, and governments in all parts of the world rely on insurance protection to offset losses from events such as natural catastrophes, and increasingly new threats such as terrorism and cyber-attacks.

Parametric solutions, which are a common feature of the ILS and catastrophe bond space, along with capital markets investor capacity continues to play a greater role in global catastrophe protection.

At the same time, efforts by the World Bank and other international organisations and governments to increase disaster resilience in both advanced and emerging markets has seen ILS increasingly become part of the risk transfer debate had by world leaders. World leaders that now realise just how important insurance is in the global fight to improve resilience against disaster and climate-related events.

Artemis discussed towards the end of 2015 how Mercer had argued the case for ILS and catastrophe bonds to be socially responsible investments, essentially adding another attractive angle to the investment case for ILS, alongside the well-known low-correlation and diversification benefits.

ILS investors are growing in maturity and sophistication all the time, and increasingly, it seems, are eager to invest in socially and environmentally responsible asset classes – something ILS generally is, argued Barney Schauble, Managing Partner at Nephila Advisors.

“We would argue that ILS generally is RI. It would be hard to find an example of a purely speculative ILS, investing in something that is irresponsible. RI in ILS is more thematic: there isn’t a line that you can draw which divides responsible ILS from ones that are not,” said Schauble.

Schauble also discussed proactive and reactive RI, with the latter providing a backstop in a similar way that any insurance solution does to ensure society can thrive.

“But there can also be a more proactive deployment, which is more typical in the weather space. For example, if you want to build a wind farm, you have to line up a financing package for the project. At the time of inception, you can agree to terms that if the wind doesn’t blow in year 1 or year 7, a risk transfer partner will step in and make a payment to ensure interest and principal for the debt incurred are not impaired,” continued Schauble.

By investing in this type of insurance solutions, Schauble explained that investors are essentially supporting such projects, underlining the RI component of the investment.

Howie and Bernhardt also highlighted the potential for ILS managers and others in the space to better consider the environmental, social and governance factors of their ILS investments, which, if improved and developed, could make the asset class more attractive to investors than desire a social or environmentally responsible investment.

“There are opportunities for ILS funds or managers who
 provide investors with access to the ILS asset class to really integrate environmental, social and governance (ESG) factors into their investment process, and also to develop a reporting framework to describe what the impact of their underlying portfolios is on social and environmental outcomes,” said Bernhardt.

Not every ILS investment opportunity can be said to be responsible, but in fact the vast majority are and much of the asset class could really fit within large investors such as pensions ESG allocation bucket.

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