ILS has an upper-edge, strong narrative when it comes to proving diversification: Convergence

For investors in the insurance-linked securities asset class, when pitching a potential allocation to their investment committees the task is helped by the fact ILS has a strong narrative to tell, when it comes to proving its diversification benefits and has the data to support that, speakers at the Convergence 2026 conference in Bermuda said today.

During a panel discussion at the event featuring end-investor allocators and an investment firm that provides specialist advisory and portfolio construction services, the speakers explained that while it’s not always the easiest asset class to present to an investment committee, the fact ILS has the data to evidence the diversification story is helpful.

Joe Tolen, Senior Investment Director at specialist advisor Cambridge Associates, said that explaining the true diversification benefits of some private and alternative asset classes can be a challenge, but when it comes to insurance-linked securities there is an easier story to tell.

“I think that’s a super-important point and something people in this room should try to build on, is that proof of diversification. Because I’ve struggled with it in my uncorrelated credit branding of trying to show certain pockets of litigation finance, and you can anecdotally tell someone that the returns of a law firm lending strategy is based on a diversified pool of fee receivables that have nothing to do with central bank policy or corporate earnings GDP growth. You can tell them that, but because all the strategies are private, it’s very difficult to show them that,” Tolen explained.

He added, “So I think ILS really has an upper-edge, in having the data available and being able to prove that diversification.

“With ILS specifically, I think diversification is the major selling point. It’s what gets people to pay attention, and it’s what gets them at the table.”

Scott Radke, CEO & Co-CIO, New Holland Capital, an allocator to the insurance-linked securities asset class, commented, “I think it starts with a governance situation. So trustees or a board and CIO that’s open to innovation, or at least not opposed to it, so there’s a climate which is receptive to these kinds of somewhat unorthodox ideas.

“Then it’s an organisation which is focused on portfolio construction, so they think about it through that lens, and as a result, can appreciate the value of the diversification that something like ILS offers. ”

Nidhi Sharma, Director & Senior Portfolio Manager – Alpha Alternatives, PSP Investments (another allocator), further explained, “I actually think ILS has a very strong narrative as an asset class. The lack of correlation is, I think, probably the most intuitive, strongest to prove out. It has a decent history of data and indices that you could check that against. The liquidity is actually really attractive, it’s short duration, it fits in the portfolio. There’s enough scale, it’s a market that has continued to grow and evolve, and you have different flavours of executing in this for different structures.

“I actually think that if you’re a long-term investor who will accept that there will be drawdowns and losses in certain years, which is the case with every single asset class, and that you can weather that kind of volatility, and that’s a portfolio construction question, then I think it’s easy to make the case.”

The panel also discussed the fact that, for investment professionals presenting the asset class to their boards there can be an element of career risk, in championing an investment strategy that continues to be considered novel at many investment committees.

Something that the availability of data to provide examples of the potential upside and downside can also assist with.

Radke commented, “To get to the finish line, you need a champion, and the champion isn’t the CIO. The champion’s the mid-level person who decides to make a run at it, probably you know in some ways unwisely at least initially, where they’re taking a little bit of career risk.”

Sharma added, “My impression is that ILS is easy to like, it’s hard to understand the risk. You have a lot of models that will tell you what happens in the worst 1% of outcomes, the worst 10% of outcomes. But, I think ultimately, sitting in an IC, looking at the people around and telling them that if you have Hurricane Katrina today, and if it goes through Miami, Philadelphia, and New York, you are looking to lose pretty much all of your capital, and that is the worst-case scenario. Are you comfortable with that? That’s where the question of enthusiasm, career risk actually comes in and I think having that candid conversation and telling people that this is what you’re finally signing up to, that in this scenario you can lose this much money and do you have that actual willingness to lose, then of course I think the pathway is clear. And if not, then either it’s a no, or scale back, or right size.”

Tolen further stated, “I think you both bringing up career risk is super important, but it depends on the investment knowledge of the IC as well, especially at a lot of public pension plans. For instance, that IC, that board they might not be made up of investment professionals, which can make it a little bit scary from a behavioural economic standpoint to back an industry that has the word catastrophe in one of their products.

“I think it’s a lot easier for them to just think, oh, you know what I would rather go down the more conventional route and potentially leave something on the table than enter into something where it could be another Katrina and it could be six months after you invest, and all of a sudden you have egg on your face, and you’re getting questions about why did you allocate it to this space. So it can be really challenging from from a career standpoint.”

Sharma added, “I can second that by saying, it’s a lot easier to present a music catalogue that everybody’s heard and can find their favourites in, versus something that is a cat bond.”