Interview to Investing in Private Markets, Europe 2020 Report: “Growth potential and resilience of ILS as an alternative capital”

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Investing in private markets remains a prevalent strategy for institutional asset owners, and one that has demonstrated resilience even through the duration of the first quarter of this year as the Covid-19 pandemic spread across the globe. This is not to say private markets investment has been without issue, in the early months of the pandemic investing capital proved problematic in part because businesses were under financial pressure, and in part that funds were unable to access financing.

This report brings together UK and Wider Europe based Investment Actuaries, Heads of Insurance Asset Management, Investment Managers, Head of Investments and Senior Specialist. We explore regulatory improvements, investigate the due diligence that investing in private markets requires, dissect the information disadvantage, evaluate diversification as a key benefit, discuss the supply and demand imbalance, and address the increased role of climate positive and infrastructure related investments.

Growing flood gap a “catalyst” for ILS: Franklin Templeton

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Global investment firm Franklin Templeton has released a new report that examines the growing role of insurance-linked securities (ILS) in alleviating flood risk, particularly in the US where the financial burden on FEMA and the Treasury seems to be increasing every year.

Penned by Jonathan Malawer, Head of ILS, Commodities & Environmental Strategies at Franklin Templeton’s K2 Advisors business, the report notes that ILS and catastrophe bonds are gaining traction globally as potential solutions to the financial risk posed by flooding.

Specifically, Malawer notes that the appetite for alternative ways to transfer flood risk is growing in response to the increasing frequency and severity of flood events.

Interest in ESG investing boosted by Covid

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One of the side-effects of the Covid-19 crisis has been an increased interest in ESG investing by UK investors, a recent Aviva survey reveals.

ESG – Environmental, Social and Governance – is now the commonly-used term to describe the three main factors in measuring the sustainability and societal impact of a company or business. Other terms that might be used include ethical, sustainable, responsible, green and Corporate Social Responsibility (CSR) amongst others.

The survey of over 500 people with investments found that over half (55%) said that the pandemic had had an impact on their likelihood to take ESG factors into consideration when deciding where to invest their money. Amongst those who said they already consider ESG, 81%  said the pandemic made this even more important.

And this new awareness of the importance of ESG has been borne out by customers’ investing behaviour on Aviva’s Direct platform.  The value of new investments in ESG funds in the six months since March has more than doubled compared with the preceding six month period.  Investing in other types of funds, meanwhile, has remained steady.

ESG fund assets forecast for explosive growth, a huge ILS opportunity

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The rapid growth of ESG (environmental, social, governance) appropriate investment products is set to create a “paradigm shift” in investment markets, which could lead to more than 50% of European mutual fund assets invested in ESG funds as soon as 2025, according to PwC.

In a recent report PwC highlights the stunning growth potential of ESG investing, forecasting a base case 21.9% compound annual growth rate (CAGR) from 2019 to 2025 and a best case CAGR of as high as 28.8%.

Those stunning growth projections go some way to explaining the focus in insurance-linked securities (ILS) and reinsurance-linked investments on developing ESG appropriate investment strategies, policies and driving home the features of ILS as an asset class that make it ESG appropriate from the start.

ILS increasingly attractive in the face of COVID-19

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As an asset class that is uncorrelated with financial markets, provides environmental, social and corporate governance (ESG) advantages and offers good returns in the current low interest environment, insurance-linked securities (ILS) are becoming increasingly attractive, Kirill Savrassov, an ILS and sovereign risk transfer specialist, told Baden-Baden Today.

ILS activity is gaining momentum because COVID-19 has highlighted the benefits of investing in an asset class that is uncorrelated with financial markets, said Savrassov.

“Another important point is that uncorrelation, together with current price increases in the reinsurance market, is making this asset class not only attractive but also reasonably priced, with good returns,” he said.

ILS tells a compelling ESG story: Carey Olsen

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Amid the ongoing expansion of the market for sustainable investment, there’s an opportunity for the insurance-linked securities (ILS) sector to show its alignment with environmental, social and governance (ESG) factors, according to law firm Carey Olsen.

Intensified by the wide-ranging effects of the ongoing Covid-19 pandemic, heightened awareness of the complex ESG challenges currently faced by society has accelerated the need for global businesses to demonstrate a commitment to sustainability, in terms of both individual business practices and external investment policies.

Against this backdrop, Artemis recently spoke with Gavin Woods, Partner, and Sheba Raza, Counsel, at offshore business focused law firm, Carey Olsen, about the increased focus on sustainability in what’s been a challenging and transformative year.

Nat cat protection gap widened in 2019 including in North America

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Despite the fact insurance and reinsurance markets become increasingly sophisticated in their use of technology to reach customers and provide enhanced coverage, in North America, perhaps the most advanced economy in insured terms, the natural catastrophe protection gap actually widened by over 7% in 2019.

It should perhaps be considered an indictment of the efforts of the industry to close the much-discussed “protection gap”, that even the most advanced regions of the world became less protected by insurance last year.

A recent report from global reinsurance firm Swiss Re analyses the data behind global protection gap issues and found that, on a worldwide basis, insurance protection for natural catastrophes is relatively flat.

Sovereign Parametric Catastrophe Bonds as means to address the protection gap in emerging countries

As mentioned by AON in their Weather, Climate & Catastrophe Insight: 2019  Annual Report, last year brought $232 billion of economic losses from natural disasters whereby only $71 billion was actually insured. It outlined that the world continue to face a fundamental issue of insurance gap, especially in emerging and developing countries, where losses for businesses and governments are only increasing following a decade-long rise in natural catastrophes linked to the climate change.

Protection gaps exist in both emerging and developed markets. However, with estimated by Swiss Re 35% level of catastrophe risk coverage in advanced economies versus 6% in emerging economies, the issue is far more important for the developing world, where the cost of disasters is not just measured in the deaths and injuries that they cause, but also in their long lasting economic impact on survivors and countries. Natural disasters there do not just destroy homes, factories, shops and fields; they can altogether annihilate years of economic growth, which is essential for the low and mid-income countries.

GREEN INSURANCE LINKED SECURITIES FRAMEWORK

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Generali has developed its first Green Insurance Linked Securities Framework, in line with the Group’s sustainability strategy.

Insurance Linked Securities are alternative financial instruments allowing for the transfer of insurance risk to institutional investors.

This Framework aims to be the first contribution to develop guidelines for Green ILS structures going forward.

The future Green Insurance Linked Securities will be characterised by the investment of the collateral in assets with a positive environmental impact, and by the allocation of the transferred solvency capital to sustainable initiatives.