Swiss Re Insurance-Linked Fund Management

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SBAI & investors highlight need for robust ILS fund valuation


The insurance-linked securities (ILS) fund sector needs to adopt robust valuation practices, particularly for less liquid reinsurance assets, according to a guidance note from the Standards Board for Alternative Investments (SBAI).

Scales valuation weighValuation is a key process within the management of ILS funds, no matter what their portfolio contains.

Across the range of insurance-linked investment assets challenges exist in finding an accurate valuation at any single point in time, no matter whether catastrophe bonds, collateralized reinsurance and other private ILS contracts, or quota shares and more traditional reinsurance forms that fund managers allocate to.

The SBAI has published a new guidance document titled “Valuation of Insurance-Linked Funds” which is targeted at providing end-investors that are conducting due diligence on ILS funds with an overview of valuation in ILS and provides guidance on a valuation framework that aligns with its SBAI Alternative Investment Standards.

The guidance has been developed by a working group of institutional investors, investment managers, and investment consultants, all working in, with, or allocating to the ILS space. It is the first in a series of notes on ILS funds that the SBAI intends to publish.

The SBAI states that because of the illiquid nature of many of ILS and reinsurance linked assets held in ILS funds, robust valuation frameworks are necessary.

The memo also provides guidance for investors on governance arrangements, processes used for hard-to-value assets and investor disclosures.

In addition, it looks at ILS fund manager procedures for, “capturing material information about catastrophe events, use of modelling, income recognition and loss estimation procedures,” the SBAI says, as well as offering suggested valuation related questions that investors may wish to pose when conducting due-diligence on an ILS fund manager.

Thomas Deinet, Executive Director of the Standards Board, explained, “Valuations are more difficult when assets or liabilities are less liquid or not traded at all. Further valuation challenges can arise for ILS funds following large loss events, such as hurricanes, where the ultimate insurance related losses may not be known for a considerable period after such an event.”

Eveline Takken-Somers, Senior Investment Manager at PGGM, a Dutch pension fund service provider that is one of the largest allocators to the ILS space, added, “Good standards are critical from an investor’s perspective, and we encourage ILS fund managers to sign up to the Alternative Investment Standards. Robust valuation procedures are of particular importance: they help to address conflicts of interest between different investors and the manager and facilitate the fair comparison of performance between managers.”

Mike France, Principal and CFO at specialist ILS fund manager Elementum Advisors, also said, “The SBAI insurance linked fund valuation memo is a nice complement to the Standards that discusses important valuations issues faced by ILS funds. The memo should serve as a useful tool to help investors assess a manager’s valuation framework.”

Michael Hamer, Partner and Senior Analyst at advisory Albourne Partners, commented that, “The process for valuing re-insurance investments is a very important aspect of due diligence, given the high levels of uncertainty that can arise after large loss events. Investors also need to understand the differing ways in which funds deal with this uncertainty, including the use of side pockets and other mechanisms that may reduce the risk of unintentional value transfers between investors. We look forward to contributing to the SBAI’s future work in this important area of investment.”

Richard Lowther, Managing Principal at Hiscox Insurance Linked Strategies further explained, “In the wake of the large property catastrophe insurance industry losses of 2017 and 2018, the need for a consistent and transparent valuation process has emerged as a key requirement for investors.

“While measuring the impact of large complex catastrophic events on private market reinsurance contracts is inherently difficult and subject to uncertainty, the asset class will only benefit from using such processes wherever possible. Hiscox ILS is proud to be a signatory to the SBAI Standards and to have helped contribute to this valuable investor toolkit.”

The SBAI ILS Working Group includes representatives from: Aberdeen Standard Investments, Albourne Partners, CPPIB, Elementum Advisors, Future Fund, Hiscox Re-insurance Linked Strategies, Nephila Capital, PGGM, PIMCO and Varma.

The document provides a useful guidance tool for investors looking to allocate to ILS and reinsurance for the first time, or looking to allocate to a new manager or vehicle.

It provides a detailed view of valuation strategies as they stand, with thoughts and ideas on how they can be improved as well by laying out the features of a robust alternative investments valuation strategy.

It also highlights the specific challenges that ILS fund managers face, as valuing illiquid assets, particularly during times of stress and when information flow may not be as rapid or transparent as desired, is clearly a difficult ask.

It discusses loss creep and strategies for managing it within the valuation process as well, particularly relevant after the impacts of hurricane Irma, wildfires and of course typhoon Jebi of late.

As a result it’s a valuable document that investors will find useful and we’d recommend our readers download a copy of “Valuation of Insurance-Linked Funds” to read over on the SBAI website.


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