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Technology drives differentiation in the insurance-linked securities (ILS) industry

With robust market conditions for ILS, Digiterre examines how ILS fund managers can exploit commercial opportunities by focussing on differentiation through technological and operational excellence.

By Digiterre

27/08/2020

With robust market conditions for ILS, Digiterre examines how ILS fund managers can exploit commercial opportunities by focussing on differentiation through technological and operational excellence.

The insurance-linked securities (ILS) market remains robust, from both the issuer and investor perspective, according to Artemis.  One of the most compelling reasons for investor interest in ILS has always been its low correlation with broader financial markets.  This has been highlighted again by the strong performance of ILS during the market volatility following the coronavirus outbreak.  On the issuer side, at mid-year, there is a good desire to come back into the market as issuers continue to appreciate the value of ILS as an asset class, according to a report by SwissRe.

Though the ILS market has managed to avoid significant impact from the coronavirus pandemic, ILS fund managers do report some losses from coronavirus related business interruption issues, which range from minimal to modest, but with little effect on ILS strategies and portfolios, according to Artemis.

This largely positive but measured market outlook calls for a pro-active approach to capturing the market opportunity while remaining highly responsive and agile, which only robust, scalable and integrated enterprise systems can offer.

In an ideal world, an ILS manager would be supported by an enterprise-class operational platform that is open, modular, cloud-enabled, multi-asset, end-to-end and, crucially, built to handle change as markets move and businesses grow.

An open platform is easy to integrate with, easy to ingest from, and simple to export data to.  It should be modular, so managers can buy what they need, and cloud-enabled, to allow organisations the option to move away from on-premise infrastructure.

In terms of business functionality, the platform must provide an end-to-end suite of tools, across the whole trade life cycle for ILS, and multi-asset support for an ever-wider range of ILS assets,  including the management of life and non-life portfolios for specialist and complex instruments such as private placements, cat bonds, IRS, CDS, FX, side cars.  This is especially important as a growth in AUM often leads to a proliferation of instruments, funds and separate management accounts and ever greater complexity.  For example, fund managers often grapple with solutions for managing increasing complexity related to portfolio management and modelling or trade capture as their scale increases.

There are many further areas of functionality that advanced technology can now unlock.  It’s increasingly possible to significantly boost the power of workflows within the operational system, improve compliance functionality, including authorisation and traceability, and create smart, roles-based interfaces to empower business users.

For example, user dashboards can be set up to simplify authorisation processes, which can be linked to notifications.  This can streamline the review and authorisation of bulk data points and improve performance analysis.  Architectural enhancements can increase the use of microservices, including Bloomberg connectivity.

It’s also possible to significantly enhance FX hedging functionality.  Currently, managers buy forwards on an investment-by-investment basis.  But advanced technology makes it possible to streamline the roll-over of all hedged positions, and create FX hedges for every exposure for all funds, from one screen.  This can save many days of effort per month and reduce hundreds of trades to a single screen.

A robust system can dramatically reduce cost overhead in the mid to long-term if onboarded early enough in a firm’s growth.  ILS managers can boost productivity per head, by encouraging business users to do the right things, in the right way – and right from the outset.  For example, we have seen a client grow AUM almost six-fold with just one additional headcount.

As managers grow in size, scale and complexity, they need to focus on points of differentiation.  Enterprise-quality software can help set managers apart from the crowd and avoid commodification as the sector grows.

For further information on how ILS fund managers can address industry opportunities using advanced technology, please explore our other insights here, here and here.