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Insurance-linked securities (ILS) market opportunity accelerates with digital transformation

Digiterre recently hosted a second roundtable on the role of technology in accelerating transformation for the Insurance-Linked Securities (ILS) industry.

The ILS sector continues to expand.  Issuance in the first six months of 2020 was already 20% higher than the entire previous year, according to a new report by Aon Securities.  The report notes that new issuance in Q2, though interrupted briefly due to coronavirus, remained steady overall for the quarter and forecasts a persistently busy pipeline over the next two quarters.

 

By Digiterre

07/08/2020

Digiterre recently hosted a second roundtable on the role of technology in accelerating transformation for the Insurance-Linked Securities (ILS) industry.

The ILS sector continues to expand.  Issuance in the first six months of 2020 was already 20% higher than the entire previous year, according to a new report by Aon Securities.  The report notes that new issuance in Q2, though interrupted briefly due to coronavirus, remained steady overall for the quarter and forecasts a persistently busy pipeline over the next two quarters.

 

Cat Bonds, other ILS instruments and direct investments into reinsurance risk are becoming an increasingly mainstream asset class.  With robust, relatively uncorrelated returns, Cat bonds are a growing source of capital for managing global risks.  They provide efficient mitigation of systemic disaster risk and can have a measurable positive impact on people’s quality of life, as evidenced in the aftermath of Haiti for example.  The sector’s momentum and resilience is driven by the growing awareness of climate related risk, such as floods, windstorms and sea levels, and of course pandemics which further compound the need for improved risk transfer.  Winners in ILS will deftly navigate challenges related to risk transfer, cash management and investor relations while remaining nimble, operationally lean and well-coordinated across functions.  So how can ILS fund managers operate efficiently and harness technology to fully exploit the market opportunity?

To be operationally lean, you need a single view of the truth.  Silos across separate teams, processes and data views create inefficiency in trading, risk, finance and operations.  Remote working will only further exacerbate these challenges.  Ideally, ILS managers need roles-based views and a coherent, real-time data set shared by all team members to support more informed decision making.

As well as improving communication and decision making, technology should also enable smarter work.  Different categories of risk are interconnected, for example, trading risk impacts on portfolio risk, operational risk impacts on realisation of gains, market exposures can translate into portfolio risk and liquidity constrains operational viability.  It’s hard to be nimble when the effects of a change to one parameter cannot be seen in the context of other constraints.  The desired state is to view exposures, performance, liquidity and investment risk in an integrated way.  This supports seamless, dynamic “what if” scenario planning and relational data structures across all data types.

Advanced technology is key to supporting growth in AUM which often results in a proliferation of instruments, funds and SMAs.  ILS is a specialised industry segment for which there are limited “off the shelf” solutions.  Instruments are complex, for example Life vs Non-Life, and contracts are allocated across different portfolios.  Managing investor expectations is critical to success and there is a natural flight to quality in times of stress.  Therefore, it’s challenging to make money without a whole-of-business view.  The ideal state is to use advanced software as a differentiator, for example, to enable scenario-planning in near real-time across all portfolios as they increase in size, complexity and number of positions – this creates a natural advantage over the competition.

Of course, the suitability of advanced software depends on firm size.  Early-stage managers, using spreadsheets and manual processes to reconcile cash with several funds, would benefit from a cloud-based, enterprise-class platform that streamlines operations, satisfies investor due diligence and scales for growth.  Mid-sized specialist ILS managers, with multiple funds, strategies and offices, need a step-up from this type of technology.  A flexible, scalable framework, that supports rapid business change, with a low technology footprint and cloud deployment would be ideal for their needs.  Multi-billion dollar asset management groups, or specialist ILS businesses within larger, multi-strategy groups, require cross-company standardisation on existing investment management platforms such as Aladdin.  A modular platform specifically designed for ILS, which has the flexibility to integrate with these investment management platforms and can be deployed in the cloud or on-premise, would be most suitable.

For ILS fund managers of all sizes, enterprise-quality software is now a major differentiator and a clear sign to their clients and other stakeholders of their institutional quality