Performance dispersion prompts flight to quality

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Ben Fox, Hiscox ILS

After a benign catastrophe environment lasting several years, the insurance-linked securities market was tested by considerable losses following a number of natural disasters. While some investors may have been hit hard by these events, it gave others the opportunity to differentiate between ILS managers and their approaches.

There is a recognition that the current hard market represents the best risk-adjusted pricing environment since 2012. This has led to increased interest and a deeper appreciation of the way the asset class works.

“In recent years, the industry experienced heightened levels of natural catastrophes whereby average performance may have underwhelmed investors, compared to what they experienced four or five years ago. The recent experience has allowed investors to understand more about an asset class in which, most of the time, nothing significant happens,” comments Dr Benjamin Fox (pictured), Principal, Portfolio Manager at Hiscox ILS.

This period of greater dispersion of returns has also given investors an opportunity to gain more insight into what really drives performance. Fox notes: “It allows investors to make an informed decision about which ILS managers to select as there is more to differentiate them now. In fact, we have seen a flight to quality in capital inflows. In the case of Hiscox ILS, we are pleased to see our active assets under management grow by 25 percent in Q2 this year.”

Fox details the characteristics of ILS investment more broadly: “Our investors’ capital is typically used to support the transfer of tail natural catastrophe risk from the traditional reinsurance sector to the wider capital markets.  For those unfamiliar with ILS, I often describe our strategies as like ‘selling call options on Mother Nature’.”

Understanding performance

It is worth highlighting that by the nature of the risk, the ILS asset class does not provide many data points for investors to critique performance. “In recent years, there has been a growing awareness that partnering with organisations like Hiscox ILS – which are able to leverage the expertise and experience of a century-plus old (re)insurance group – leads to stronger performance,” Fox adds. 

For instance, following a significant catastrophe event, claims are often complex and can take time to develop. While these factors can be extremely challenging for managers with limited resources and practice, Hiscox has a successful track record of delivering reliable and robust valuations for its funds.

With asset prices high across many sectors of the investment landscape an investment in ILS continues to look appealing. “The current environment represents an opportunity to grow the ILS market and also develop innovative solutions for those seeking financial protection, in both cases we see a range of attractive investment opportunities for our investors,” Fox outlines. 

For long-term investors who see ILS as a strategic position in their portfolios, their commitment has remained strong and, in many cases, their tactical allocation to the class was overweight versus their strategic targets.

In addition, ESG factors are increasingly a big focus for investors. Aaron García Ehrhardt Principal, Portfolio Manager at Hiscox ILS, notes: “At Hiscox ILS we are a big supporter of many of the World Bank and other similar development agencies’ initiatives to transfer risk to the capital markets and are happy to put our investor capital to work assuming transactions are well-structured, well-understood, and well-priced.”

More broadly, Fox discusses: “The nature of the risk is constantly changing, climate change, increase in coastal population and wildfire-urban interaction (WUI) changes are examples of this. At Hiscox, we devote resources to research the impact of these changes, and develop tools that help us quantify, monitor and manage their impacts.”

Improving models

Outlining the way technology has supported expansion in the ILS sector, Fox remarks: “Natural catastrophe models are used as the currency of risk in our asset class. Like all models, they have utility, but require careful augmentation and implementation to be most effective.”

Hiscox ILS investors benefit from the manager’s relationship with the wider Hiscox Group which licenses all of the major catastrophe models and calibrates them based on their own research.

Fox highlights: “While we regularly update our views on the models’ strengths and weaknesses and supplement as we see fit, we have long been lobbying the providers of these models to better capture the additional uncertainty that comes with climate change. 

“Although the response has been slower than anticipated, we are pleased to see positive developments which should give investors the confidence that, as an industry, we are using the most appropriate views of risk available.”

Cyber ILS offers an attractive investment opportunity

The Hiscox team also identifies the growth outlook for cyber ILS should be considered within the broader industry context where participation and experience in the asset class has helped investors become more sophisticated in their approach to ILS.

Global cyber insurance premiums tripled over the last seven years and reinsurers are facing accumulation issues, similar to those existing in natural catastrophes. Given this, cyber is tipped to be the most prominent growth opportunity within the ILS universe.

“The number of cyber insurance claims is increasing exponentially every year, with insurance premiums having grown three-fold over the last seven years” explains García Ehrhardt. “Cyber risk has commonalities with catastrophe risk. Although attractively priced, too much of it is problematic for insurance and reinsurance companies, who face accumulation issues and look for solutions to transfer part of the risk off their books.”

Investor appetite for these instruments has been positive. García Ehrhardt remarks: “We are seeing a high level of interest in cyber ILS on behalf of all our investors. We are currently working on investable structures, but there are a few challenges that still need to be overcome.”

The notion of insurance and reinsurance companies using securitisation to transfer risk off their balance sheets was what led to the inception of the ILS market in the first place. So the move to doing the same with cyber risk is the next evolution in the market. 


Ben Fox, Principal, Portfolio Manager, Hiscox ILS
Dr Ben Fox joined the Hiscox ILS team as a Portfolio Manager in April 2018. Based in Bermuda, Ben is jointly responsible for portfolio management across Hiscox ILS strategies. Prior to joining Hiscox, Ben worked at the Ontario Teachers’ Pension Plan (OTPP) as Principal of Insurance-Linked Securities. Ben has also worked at the World Bank, Aon Benfield and RMS. Ben graduated from the University of Oxford, UK in 2002 with a Master’s Degree in Earth Sciences followed by a DPhil Seismology in 2007.

Aaron García Ehrhardt, Principal, Portfolio Manager, Hiscox ILS
Aaron García Ehrhardt joined the Hiscox ILS team as a Portfolio Manager in September 2017. Based in Bermuda, Aaron is jointly responsible for portfolio management across Hiscox ILS strategies. Prior to joining Hiscox, Aaron worked at Lloyds Syndicate Novae in both Zurich and Bermuda as an international property catastrophe underwriter and as a broker at JLT in London. Aaron graduated with honours from a double degree BA programme in Business Administration at the University of Cardiff, UK and IESIDE Business School, Spain in 2010. Aaron holds a US Chartered Property Casualty Underwriter designation (2016) and is a Chartered Financial Analyst (2019).

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