Portfolio management services
Published
Description
Insurance Linked Securities (ILS) (mainly referring to natural catastrophes). 3) Technical specification 3.1) Insurance-linked securities (ILS) is a term used to cover an array of financial instruments whose values are driven by insurance loss events — catastrophes. These instruments are linked to property losses caused by natural and manmade catastrophes and represent a unique asset class given that returns are both uncorrelated and independent from the general financial market. ILS has its origins in the Catastrophe Reinsurance market, the business of reinsuring Insurers for the natural catastrophes which they have insured. 3.2) The Catastrophe Reinsurance market has existed for hundreds of years and has evolved into a deep and mature global market with around 500 000 000 000 USD of risk reinsured. It is dominated (around 450 000 000 000 USD) by privately negotiated and non-tradeable reinsurance contracts and represents the private side of the Catastrophe Reinsurance market. As capital markets have become interested in accessing this market, ILS were introduced to allow investors and fund managers access in the form of securitised instruments rather than the more traditional form of direct insurance contracts. 3.3) Today, ILS, the public side of the overall Catastrophe Reinsurance market, represents about one-tenth of the whole and is made up of Catastrophe Bonds, Collateralised Reinsurance contracts, Industry Loss Warrants (ILWs) and Sidecars (or Quota shares). ILS themselves are bond like instruments which are securitised on the underlying catastrophe risks. 3.4) The underlying risks of ILS are catastrophic perils such as hurricanes, storms, earthquakes, floods and manmade disasters (marine, aviation, among others). Having underwritten such disasters, an Insurer may wish to reduce or diversify its risk, and seek to “cede” it to a reinsurer or to a fund manager. Investors can access (via a fund manager) the returns on offer (premiums paid for the reinsurance cover) through a diversified portfolio of ILS investments. 3.5) Specialist fund managers seek out ceded risks and structure diversified portfolios of ILS investments. The investor pays collateral up front (equivalent to the nominal in a bond transaction), in return for an annual insurance premium (equivalent to the coupon in a bond transaction). In the event of no perils occurring over a pre-specified period of time (usually between one to 3 years), the collateral is repaid in full, in addition to an annual coupon. During the term of the contract, the collateral is invested in cash or high quality credit assets earning Libor. In the early 1990's (post Hurricane Andrew), Cat Bonds evolved as a way of spreading risk and enabling capital markets to access the reinsurance industry. Capital markets are thus relative newcomers to reinsurance, providing capital to an otherwise mature industry. 3.6) In addition to packaged Cat Bonds, ceded risks can be transformed into “securitised notes”' these are originated by insurers/reinsurers and sold to fund managers looking to access more targeted risks. Fund managers themselves are not permitted to underwrite risks and issue insurance directly, but most fund managers have insurance industry professionals among their ranks and bring the necessary expertise to their product offering. 3.7) The main reasons for investing in ILS are the low correlation of returns with other asset classes and the independence of the asset class and attractive returns in a low yielding environment.
Timeline
Award date
6 years ago
Publish date
6 years ago
Buyer information
North Yorkshire County Council
- Contact:
- Mr Mark Tserkezie
- Email:
- procurement@northyorks.gov.uk
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