ILS ADVISERS 9


As Asia-based ILS consultant ILS Advisers launches the first fund-of-funds, Stefan Kräuchi, a partner in the company, explains how this new type of fund is expected to attract a flurry of new investors into the rapidly increasing ILS space.


A


s interest in insurance and risk-linked securities (ILS) continues to grow, new issuers and investors are springing up


for the first time, encouraged by the onslaught of new products in the space.


One of these new products, ILS Diversified,


the first fund-of-funds which offers investors the opportunity to take a diversified approach to the asset class without requiring them to pick individual funds will, according to ILS Advisers’ Stefan Kräuchi, encourage new investors into the space.


“We believe there are many institutional and


qualified private investors who could benefit from investing in ILS but do not have the know- how and time to do so,” he says. “ILS Diversified will be able to accommodate those investors.”


By analysing a collection of the funds together, Kräuchi says, investors who were previously unable to diversify their ILS investments will now be able to access a wider slice of the market, one that was formerly unavailable.


“For many investors their allocation to the asset class is too small for them to be able to diversify their ILS investments across different funds. Our investment process means that we can offer investors a fund product that is optimal from a mean/variance perspective as well as from a peril diversification and from the perspective of expected loss multiple,” he says.


Fuelled by mounting global interest, the launch


of ILS Diversified was timely as many investors are currently looking for attractive investment opportunities.


“On April 10, 2014 Greece raised $4.1 billion in


five-year bonds at a yield of less than 5 percent— the issue was seven times oversubscribed,” says Kräuchi. “Looking at this example I think the launch of our ILS Diversified is still very timely.”


Kräuchi says that given the positioning of the insurance cycle, the fund began with just over $21 million, but the company will continue to grow the assets of the fund carefully and in line


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with investment opportunities. However, he is quick to point out that should conditions in the reinsurance market become favourable, the fund will grow the asset base more aggressively.


ASIA WILL BE NEXT ILS are different from other alternative asset classes in that the asset class per se is not correlated to anything else, as opposed to approaches that are based on manager skills, like many hedge fund strategies. There are no alternatives to ILS Diversified at this time, meaning fund-of-funds that allow investors to diversify across the whole range of instruments available to the ILS fund managers—cat bonds, private ILS and industry loss warranties (ILWs)—have the Eurekahedge ILS Advisers Index as their benchmark.


Based in Asia, ILS Diversified is the first fund


based in the region. Kräuchi says that the asset class is still not very well known or appreciated among Asian investors, especially with regard to its diversification benefits.


“The ILS funds are still located in Europe, the


US and Bermuda in order to be closer to the investment opportunities,” says Kräuchi.


“Also, the absolute return expectations of


Asian investors are often above what ILS can deliver, and there is a distinct oversupply of reinsurance capacity in Asia at the moment due to the generally lower insurance penetration as well as other reasons.


“However, we expect that over the medium


“We expect that over the medium term Asia (and in particular China) will be among the largest buyers of natural catastrophe capacity worldwide.”


term Asia (and in particular China) will be among the largest buyers of natural catastrophe capacity worldwide. This is due to the rapid urbanisation, which increases the accumulation and concentration of insured values in a relatively small area and creates new and bigger peak exposure zones; the economic growth, which acts as an additional accelerator; and the increasing insurance penetration, which acts as another accelerator on top of the other two. Asia will need solutions to address its rapidly growing exposures, and ILS are well suited to play a role in this.”


HERE TO STAY While the debate over the longevity of the convergence capital continues to rage, Kräuchi firmly believes that the asset class is well and truly here to stay, and says that it will absorb “well understood perils”.


“This asset class has demonstrated that it is


able to provide capital-efficient reinsurance solutions to large, standardised portfolios that are highly exposed but their perils well understood. These types of covers will therefore increasingly become the domain of ILS funds, whereas the natural playing field of reinsurers will be more the complex risks, complex portfolios and less understood perils,” he says.


He is quick to warn, however, that the


industry should not underestimate the power of innovation.


“What is next?” he says. “Will ILS venture into


more complex portfolios and/or less understood perils, or will it venture into more lines of business, away from property cat? We should not underestimate the power of innovation. History has always included waves of innovation, with investors becoming more sophisticated or simply changing their tastes. It is hard to predict which way the ILS asset class is heading, because we seem to be once again at the beginning of a wave of innovation and sophistication.” n


INTELLIGENT ILS JUNE 2014


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