Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ILS investors increasingly educated about reinsurance asset class: Twelve Capital


Discussion surrounding a ‘lack of education’ of investors in the insurance-linked securities (ILS) and reinsurance linked investment space “is several years out of date,” as ILS market investors are increasingly educated about the asset class, according to Swiss ILS manager Twelve Capital.

The level of education of ILS investors has often been called into question in mainstream publications, but increasingly, as the ILS asset class becomes more mature and grows in complexity, investors are showing a willingness and desire to gain a deeper understanding of the asset class.

“The due diligence process of investors is ever more detailed and the pension funds are certainly well-educated as to the nature of risk. Commentary around a ‘lack of education’ of industry participants is several years out of date,” explains Twelve Capital.

Adding; “Also note that pension funds have always been the major providers of equity investment for traditional reinsurers so they just become more proximate to the same risk as their education improves.”

As the asset class grows in popularity and complexity, highlighted and demonstrated by the rise of collateralised reinsurance and alternative reinsurance capital, the need for education becomes apparent. Investors now expect a substantial level of detail from ILS managers when conducting their due diligence process.

Twelve Capital notes that investors will likely have contracts with more than one ILS manager and “therefore be able to compare and contrast the service they receive.”

Which, coupled with the significantly improved levels of detail and granularity in regular reporting ensures “investors are being continually educated by their manager around the portfolio, their investment and how these investments are performing,” advises Twelve Capital.

The ILS growth trend is expected to accelerate over the next few years as the fundamentals of the global reinsurance sector are tested and reshaped amidst intense competition, ample capacity and the growing acceptance of ILS and reinsurance as a viable and valuable, diversifying addition to an investors portfolio.

So as the volume of ILS and third-party reinsurance capital continues to expand, with predictions that it could contribute $150 billion of global reinsurance capital by 2018, the education of ILS fund managers has increased also, which in turn leads to increased education of investors, via reporting, due diligence and shared experience.

It’s vital from an investor’s perspective that they understand the benefits and risks of the ILS and reinsurance-linked investment asset class within their portfolio, and Twelve Capital signals that the education of ILS investors is far more advanced than recent commentary suggests.

Also, explains Twelve Capital, the education process has been aided by the industry experience and knowledge offered by those that work at the firms that invest in ILS.

Twelve Capital said; “Larger established pension funds investing in the ILS market today tend to be staffed by the same individuals that have been investing through various points of the Bermudian reinsurance cycle for a significant period of time.”

It’s a positive sign for the market that investors are requesting greater levels of granularity, undergoing continued education and seeking to better understand the work that ILS managers perform. That helps to keep managers on their toes, but also ensures that when losses do happen investors have received as much transparency as possible in advance, which helps to lessen the potential for surprise.

Transparency and education are key in any asset class and in ILS there is a definite trend towards sharing of information, between managers and investors, education to help investors come to terms with making their first allocation and an ongoing process to keep investors informed of ILS developments.

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