The three C’s that underpin integrated ILS solutions: Horseshoe’s Brian Desmond

By utilising the same insurance-linked securities (ILS) servicing specialist to provide re/insurance management and fund administration, benefits can be realised across capital raising, coordination, and cost, according to Horseshoe’s Brian Desmond.

As the ILS asset class has matured alongside the enhanced sophistication of its investor community, there’s been a rise in demand for integrated solutions in areas such as actuarial valuations, administration and management.

With this in mind, Artemis spoke with Desmond, EVP and Head of Fund & Corporate Services at Bermuda-headquartered insurance or reinsurance management and fund administration ILS specialist, Horseshoe.

“The successful launch of an ILS platform requires set-up and consultancy services, fund administration, re/insurance management, valuation, and corporate services,” began Desmond.

“Traditionally, an investment manager would appoint multiple service providers to perform these services, but at Horseshoe we recognise the added value of providing our clients with an integrated solution by efficiently covering the entire value chain and offering all these key services within one organisation. This is the way we have been set up since 2011 and it has proven to be a very efficient model.”

“Significant regulatory changes introduced in recent years have also driven the need to outsource these services to specialist providers to ensure compliance.”

By partnering with a specialist like Horseshoe, who has the expertise and a proven track record on such services, delivering them as one team but with clear segregation of duties and controls, Desmond explained that numerous benefits can be achieved for both ILS investment managers and their clients.

“For – us this is simple, it boils down to the three C’s: capital raising, coordination and cost,” he said. “Capital raising in such a competitive environment is of major importance to all ILS fund platforms, and as ILS matures as an asset class, institutional and sophisticated investors expect the combined fund and re/insurance structure to be managed by the same administrator, just as they would with a master/feeder hedge fund structure.”

Additionally, leveraging a single service provision contributes to improved governance, compliance, as well as integrated reporting, which, as noted by Desmond, have become priorities in the ILS sector.

“ILS Investors have a greater confidence knowing that independent experts are involved in these critical areas across ILS fund and re/insurance management operations,” he said.

The second C, improved coordination, leads to increased operational efficiency, and Desmond told Artemis that this is vital to the success of any ILS structure.

“When the administration of the re/insurance transformer and the fund is performed by the same service provider, clients can achieve operational excellence and greater controls in key areas such as execution of new deals, funding of cash, documentation, sharing of critical NAV information and annual audit.

“Additionally, we recommend that the valuation of the contracts within the transformer are performed on the same Fair Value GAAP basis as the Fund, which provides continuity and alleviates the need to revalue between the transformer and fund accounts. This alone delivers real value.”

Alongside the requirement for high-quality, effective solutions, Desmond highlighted the fact that clients also look to minimise expenditure.

“Finally, we have cost. Horseshoe continues to be a front runner, meeting clients’ expectations by providing an integrated and cost-effective offering.”

Considering Horseshoe’s approach as an ILS integrated solution that combines fund administration and insurance or reinsurance management services, we asked Desmond about the potential for any conflicts of interest.

“Personally, I struggle to find any conflicts of interest when the re/insurance and fund structures are established within the same ILS platform, as the success of the fund is dependent on the success of the underwriting performance of the re/insurance deals.

“Both entities co-exist because of investors’ desire to invest into the ILS asset class, by initially capitalizing the fund and subsequent investments by the fund into re/insurance transactions. Therefore, the administration and governance of both entities should be driven by the same goal of ensuring the investor’s capital is invested and managed in accordance with the fund’s offering document,” he explained.

Regarding appropriate segregation, continued Desmond, Horseshoe separates these services due to the specialised nature of the services, as well as to ensure it meets regulatory and compliance requirements.

“For example, we have a dedicated team specialised in fund accounting and another team specialised in insurance accounting. While there is great coordination and cooperation between these two teams, there is also segregation of duties and responsibilities resulting in better governance and extra layers of control resulting in improved accuracy whereby teams apply checks and balances to each other’s work.”