Responsible investors still require a minimum return: Convergence 2023

Although there are investors waiting on the side-lines of the insurance-linked securities (ILS) market with an interest in responsible transactions, there’s still a need for a minimum return which outweighs the importance of liquidity and diversification, according to industry experts.

During the final panel at Bermuda’s annual Convergence event yesterday, Sarah Demerling, Partner, Head of Investment Funds and Co-Lead of Re/Insurance & ILS, Walkers, moderated a panel on responsible ILS investing.

“I think we all recognise how ILS fits into ESG, it’s socially, environmentally responsible. We’ve seen the speed to market in which the capital comes in to provide recovery,” said Demerling.

Demerling questioned whether there’s investor appetite to tackle emerging market issues.

“I think probably it’s worthwhile having a quick look at who are ILS investors, because I don’t think that there is one ILS investor with a unique or a uniform feature. I think there are different groups of ILS investors, and they use it for different purposes in their investment cases,” said Stephan Ruoff, Global Head of ILS Capital, Schroders.

A large portion of the ILS investor community is made up of pension funds, which Ruoff explained look for certain features, such as tail driven distribution and some liquidity that is decorrelated and diversified, with a high predictability of return.

Alongside pensions funds, large wealth manages and alike, Ruoff explained that there’s other ILS investors that are very interested about transactions that would potentially sit in the protection gap discussion.

“There are more investors that are driven out of a do good argument, actually. And here you find foundations, you find state owned entities who are willing to put money into funds who support development of countries. And I think that is an investor base that usually does not go into traditional ILS investing, and they sit a bit on the side lines, actually. And I think it’s that group of investors that we potentially should discuss a little bit more today,” said Ruoff.

In response, Tom Johansmeyer, Global Head of Index Classes, Inver Re, highlighted that the three legs of liquidity, minimum return, and diversification, are not equal in size.

“In my work in placing ESG business and structuring things like the carbon offset derivative in the Titania Re cat bond transaction, I found that minimum return is the most important of these three most important things,” said Johansmeyer.

“If you’ve got diversification and liquidity, but you’re not making enough money, that’s just not going to be good enough. If you’ve got a certain amount of liquidity and a minimum return, but you’ve got some diversification issues, okay, then you can talk to the alpha leaning funds, and you’ve got something to work with.

“But that minimum return is going to be, I think, the biggest challenge I’ve seen in connecting ESG opportunities with the ILS market, because you can tell end investors, you can tell ILS managers all day long about the diversified opportunity you’re going to bring, but if it’s just not going to make any cash, it’s a pretty short conversation in my experience,” added Johansmeyer.

For panellist Dr. Raveem Ismail, Head of Parametric Underwriting, Africa Specialty Risks, this goes back to the ‘do-gooders’ mentioned earlier in the panel.

“For all of the investment into making communities more resilient or helping the base level of the economic pyramid, the smallholder farmers in many of these areas, all of those donors and funders they want to make sure that resilience comes at the minimum price. If that’s the case, then there’s not necessarily enough left for any kind of innovative risk transfer,” he explained.

Adding, “Now, does that mean that there needs to be a minimum quantum or a minimum volume of investment, in such a way in order to make an attractive prospect for ILS? That I don’t know, but to date, none of the efforts in developing economies have made it to ILS or securitization.”

Also read:

– Significant investor interest. A wall of money, but slower moving: John Seo at Convergence.

– ILS market size matters. We need to make it scalable: Convergence panel.

– The “most pronounced” risk-adjusted ILS returns: Tangency’s Stanton at Convergence.

– Bermuda remains world-leader for cat bonds, ILS and Convergence.