Growing flood gap a “catalyst” for ILS: Franklin Templeton

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Global investment firm Franklin Templeton has released a new report that examines the growing role of insurance-linked securities (ILS) in alleviating flood risk, particularly in the US where the financial burden on FEMA and the Treasury seems to be increasing every year.

Penned by Jonathan Malawer, Head of ILS, Commodities & Environmental Strategies at Franklin Templeton’s K2 Advisors business, the report notes that ILS and catastrophe bonds are gaining traction globally as potential solutions to the financial risk posed by flooding.

Specifically, Malawer notes that the appetite for alternative ways to transfer flood risk is growing in response to the increasing frequency and severity of flood events.

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Does innovation receive the attention it deserves in your company? Are you able to scale your business? Do you have business ideas but don’t see how IT can support or enable them? If so, this article is definitely for you!

ILS managers are technology companies that happen to work at the intersection of (re)insurance and capital markets. Such a statement is increasingly adopted by companies seeing innovation as a key driver of their comparative advantage. Whether this involves creating new business products or business models, innovation and technology must be central to strategy and managed as a fundamental capability.

To gain such a competitive edge, ILS managers need a front-footed, strategically aligned innovation and technology organization. In reality, however, many lack such an organization, and experience significant challenges in their IT architecture that detract from the desired strategy instead of reinforcing or even shaping it. What is needed is the capability to manage the company’s IT assets and drive the discovery and adoption of innovative solutions that advance the business strategy.

Falling gov bond yields make ILS an even more valuable diversifier: Schroders

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The value of insurance-linked securities (ILS) as a diversification play within asset portfolios is now even higher, as falling government bond yields have made other diversifiers less attractive at a time when ILS is only increasing its value proposition to investors.

This is according to Stephan Ruoff, Head of specialist insurance-linked securities (ILS) and reinsurance investing firm Schroder Secquaero and Brad Angle, Alternatives Director at global asset manager Schroders, in a recent paper.

The response of Central Banks to the COVID-19 pandemic has driven a divergence in the fortunes of some alternative asset classes known typically as offering portfolio diversification.

Cat bond market benefiting from a “flight to simplicity” in ILS

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The flight to quality in the insurance-linked securities (ILS) market has been well-documented, as some investors have opted to shift allegiance to ILS fund managers that are deemed higher quality, due to their longevity, track-records, or affiliations.

But now we can add to that a “flight to simplicity”, coined by RenaissanceRe CEO Kevin O’Donnell recently, specifically referring to the catastrophe bond market.

Together, quality and simplicity cover a lot of the bases that institutional investors are seeking within the ILS asset class at this time.

Institutional quality, quality of the portfolio of risks invested in, quality of track-record, quality of process, strategy, documentation, reporting, terms and conditions, people and partnerships, amongst other factors.

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Alphabet, Inc., the holding company for Google and its many units, has entered the catastrophe bond market for the first time, as the technology giant seeks $237.5 million of earthquake insurance protection that will be fully collateralized through the issuance of a Phoenician Re Ltd. (Series 2020-1)  cat bond transaction to capital market investors.

The technology giants of this world all carry significant exposure to catastrophe, severe weather and climate risks and looking to the insurance-linked securities (ILS) market as a source of efficient capacity that can support their insurance needs is a natural step for companies so focused on innovation and efficiency.

Alphabet, which acts as a holding company for all of the Google tech operations, is looking to secure California earthquake protection from the capital markets, in a deal that will see the firm’s captive insurer ceding risk to a global reinsurance firm, that will in turn enter into a coverage agreement with a special purpose insurer (SPI) Phoenician Re Ltd. which will issue the cat bond notes to investors.

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The countries of China’s Belt and Road Initiative (BRI) are largely unsupported by insurance and would benefit from the introduction of insurance-linked securities (ILS) into the region, according to Kirill Savrassov, chief executive of Phoenix CRetro.

Speaking in an Intelligent Insurer Re/insurance Lounge webinar titled “New domiciles, new risks, new structures: another evolution for ILS”, which took place ahead of SIRC 2020 Re-Mind, Savrassov highlighted how a cat event in one of those countries could cause wider repercussions for the delivery of the BRI.

“Those countries are receiving billions and billions of investment into their transport and critical infrastructure but remain uninsured and uncovered for large natural disasters,” he said.

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A 7.0-magnitude earthquake struck Friday in the Aegean Sea between the Turkish coast and the Greek island of Samos, killing at least 91 people and injuring over 1,000 amid collapsed buildings and flooding, according to the latest official data available. The quake also made a couple of victims, and injured 19 people, in addition to the material damages.

The quake was felt across the eastern Greek islands, but also much further, in Athens and Bulgaria. In Turkey, it shook the regions of Aegean and Marmara. Although citizens of Istanbul have also felt the seismic wave, no damages were reported in the city.

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One of the side-effects of the Covid-19 crisis has been an increased interest in ESG investing by UK investors, a recent Aviva survey reveals.

ESG – Environmental, Social and Governance – is now the commonly-used term to describe the three main factors in measuring the sustainability and societal impact of a company or business. Other terms that might be used include ethical, sustainable, responsible, green and Corporate Social Responsibility (CSR) amongst others.

The survey of over 500 people with investments found that over half (55%) said that the pandemic had had an impact on their likelihood to take ESG factors into consideration when deciding where to invest their money. Amongst those who said they already consider ESG, 81%  said the pandemic made this even more important.

And this new awareness of the importance of ESG has been borne out by customers’ investing behaviour on Aviva’s Direct platform.  The value of new investments in ESG funds in the six months since March has more than doubled compared with the preceding six month period.  Investing in other types of funds, meanwhile, has remained steady.

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ESG fund assets forecast for explosive growth, a huge ILS opportunity

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The rapid growth of ESG (environmental, social, governance) appropriate investment products is set to create a “paradigm shift” in investment markets, which could lead to more than 50% of European mutual fund assets invested in ESG funds as soon as 2025, according to PwC.

In a recent report PwC highlights the stunning growth potential of ESG investing, forecasting a base case 21.9% compound annual growth rate (CAGR) from 2019 to 2025 and a best case CAGR of as high as 28.8%.

Those stunning growth projections go some way to explaining the focus in insurance-linked securities (ILS) and reinsurance-linked investments on developing ESG appropriate investment strategies, policies and driving home the features of ILS as an asset class that make it ESG appropriate from the start.

Cat bond activity to pick up, issuance conditions attractive: GC’s Des Potter

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Cat bonds are set to buck the trend elsewhere in the ILS market, with a strong issuance pipeline for Q4 2020 and Q1 2021. This is according to Des Potter, managing director ILS origination and structuring at GC Securities, part of Guy Carpenter, in an interview with Artemis.

Encouraged by the firming of reinsurance and retrocession rates, he thought cat bonds would help fill the capacity gap in the retrocession market, where the availability of collateralised aggregate protection has dropped off significantly since 2019.

“We’re seeing a shift away from collateralised reinsurance into the bond market to try to reduce some of the pressure that may exist because investors in the collateralised reinsurance space are pulling back. We’re expecting to see quite an active Q4 in terms of cat bond issuance.”