Where There is Muck, There is Brass: The Place of Insurance-linked Products in Global Asset Allocation

1. Monday, 08 October 2018
Where There Is Muck, There Is Brass
The place of Insurance-Linked Products in global asset allocation
UNDP, Disaster Risk Reduction Workshop
4th - 5th October 2018, Istanbul
Kirill Ilinski Fusion Asset Management

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Paradigms in Asset Allocations
Constant evolution:
• 50s - Traditional 60/40 theory, ended with Modern Portfolio Theory
• 70s - Diversification, diversification, diversification, ended with Dot-com Bubble
• 00s- Adding new asset classes - ‘The Alternatives’ etc, ended in market
crash 08-09
• Current – Factor Investing. Need more uncorrelated yielding factors
In the new paradigm for Global Asset Allocation:
ILS against natural disasters – operate independent of financial market variables
and constraints. No (limited) correlation with stock market but can be scaled up to
Financial market-type scale.

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There is Money to be Made Here
Source: Artemis, April 2018
Year
Percentage(%)

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Cat Bond & ILS Issuance Landscape
The facts:
• The 2018 issuance sets record, $5.7 billion (April 30th
2018)
• Outstanding market $33 billion
• Outpacing 2017’s issuance by $1.2 billion
The issues:
• Retail money cannot be invested directly and the bonds
are held within specialised funds
• Prices, rating and yields rely on complex computer
simulations that are highly sensitive to the data applied
in the models
• ILS have short time horizons
Source: Artemis, April 2018
ILSandCatBondMarketSize($)
Year

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How Big is ILS Compared to the Capital Markets
Global Bond Market: $100 trillion
Global Equities Market from the top 60
exchanges: $69 trillion
Cryptocurrency Market:
$800 billion
AUM of Hedge Fund
Industry: $3.6 trillion
Global Real Estate Investment
Market: $8.5 trillion
ILS and Cat Bond
Market size: $33 billion
Bitcoin: $115 billion

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There are not that many sources of uncorrelated yield. ILS attracted attention and premiums came in.
Premiums have dropped on CAT Bonds/ILS making the market less interesting to investors.
It’s important to have high enough premiums for global managers to be interested.
Relative attractiveness of ILS
is driven by:
• GDProduct growth
• Sovereign Risks
• Primary Rates
• Complexity
• Actual Losses
Uncorrelated Does Not Mean Interesting
Source: Artemis, April 2018
Multipleofexpectedlosstocoupon
Year

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The Challenges
• Complexity of ILS/Cat Bonds requires the education of interested parties
• Currently (primarily) done through specialised funds and Hedge Fund. Wide acceptance requires
“retailable” vehicles: ETFs, ETNs etc.
• Benchmarking need widely accepted capital-market oriented indices
• Comparative returns apply “structuring tricks” from usual Capital Markets to make it interesting
• Difficult to execute smaller deals Notes, Asset-Backed ILS (ABILS)

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