Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Institutional investors still need educating on catastrophe bonds


The recently published report on Insurance Linked Securities (ILS) by independent publisher Clear Path Analysis contains a roundtable interview which involves two representatives of pension funds who don’t currently invest in catastrophe bonds or insurance-linked securities and asks them what they think of the asset class. Their comments suggest that there is still a need to better educate institutional investors about the risks and potential rewards of catastrophe bonds.
Elizabeth Garner, a trustee from the Atkins Pension Plan, is first to comment after being asked how she feels about insurance-linked securities. She responds that her fund have looked at ILS but haven’t actually invested in them and states that she see’s it as akin to gambling on reinsurance. She adds that awareness of the losses borne by Lloyd’s syndicates in 2011 doesn’t really encourage them to look too hard at this asset class. Ben Shaw, Development Director of the Occupational Pensions Trust, added his thoughts saying that while ILS and cat bonds seem very attractive he has had difficulty, as a relatively small pension scheme, finding an investable bond and how to gain diversification.

Diversification is what comes across as vital to these investors. They both express a desire to be able to clearly see the risks and spread of their investments and that they don’t want to be invested into a single region or peril and say that the opaqueness of cat bonds can be off-putting. ILS funds should note this opportunity to sell your diversified portfolio approaches to these types of investors but ensure you give them sufficient transparency on the risk weightings within your portfolios. The ability to move in and out of positions and exposures comes across as another concern in this roundtable so again ILS fund managers should be thinking about how they can promote their activities in the secondary markets and how agile they can be when disaster threatens.

Garner cites a concern with regards to corporate governance and ethics of investment in catastrophe bonds, particularly highlighting a level of discomfort over profiting from someone’s misfortune after disaster. This can always be an issue with certain investors governance policies but is worth noting. Of course there are also many reasons to say that by investing in catastrophe bonds you are providing capacity to support insurance in regions where cover may become scarce or very expensive otherwise.

Finally both investors make an interesting comment regarding whether they would follow other investors into the space. Even if large pension funds or public sector plans were allocating money into ILS and cat bonds en mass, that alone would not be enough to convince them, it would still be vital for them to become comfortable with the asset class first.

Interesting comments I’m sure you’ll agree. Those within the ILS and cat bond sector can be forgiven for assuming that institutional investors would have some knowledge of the space, and while those involved in the round-table do, they clearly require further information to give them the comfort to allocate to the space. Given the vast spectrum of the investable landscape that pension funds have to assess and make decisions on allocating to or not, our rather small (although growing) ILS and cat bond market is understandably not at the top of their lists, hence the lack of understanding and appreciation at times.

It’s imperative that those within the space continue to further the education of institutional investors to continue attracting capital into the sector. Keep telling those positive stories of investors who appreciate their allocation to cat bonds and ILS, continue to push your success stories to the press to further the reach of these instruments as an asset class and remember to submit your articles to us so we can push them to a global investor audience.

It’s well worth downloading the Clear Path Analysis report on ILS at their website to read this interview and other insights in full.

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