ILS feature several characteristics that make them attractive investment vehicles.
- Low correlation: Insurance exposure to natural catastrophic events are (mostly) uncorrelated to financial markets.
- Quantitative approach to understanding risk/return: Third party vendors provide technically robust models that pair well with a scientific basis of risk selection and understanding of natural perils.
Hiscox Re ILS is able to pair the above with the unique characteristics of the reinsurance market:
- Inefficient markets: Relationship driven, illiquid transactions trading on a few dates per year result in limited commoditization of price and risk.
- High barriers to entry: Counterparties favour trading with a small number of highly rated reinsurers with an established track record. Margins vary considerably.
There are three main types of ILS.
- Catastrophe bonds: Securities traded on capital markets anchored to natural catastrophe and extreme mortality/morbidity events.
- Industry Loss Warranties: Contracts that pay out when a given industry event exceeds a predetermined total loss.
Collateralized reinsurance: Private transactions through which investors can access the traditional reinsurance market.
Hiscox Re ILS currently focuses on traditional and collateralized reinsurance.