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2018 DRR Financing 5.4 Kirill Ilinski


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

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2018 DRR Financing 5.4 Kirill Ilinski

  1. 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
  2. 2. Monday, 08 October 2018 Fusion Asset Management LLP 2 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.
  3. 3. Monday, 08 October 2018 Fusion Asset Management LLP 3 There is Money to be Made Here Source: Artemis, April 2018 Year Percentage(%)
  4. 4. Monday, 08 October 2018 Fusion Asset Management LLP 4 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
  5. 5. Monday, 08 October 2018 Fusion Asset Management LLP 5 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
  6. 6. Monday, 08 October 2018 Fusion Asset Management LLP 6 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
  7. 7. Monday, 08 October 2018 Fusion Asset Management LLP 7 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)
  8. 8. 8-10 Great George Street, Westminster, London, SW1P 3AE 0207 802 22 80 Fusion Asset Management LLP is authorized and regulated by the Financial Conduct Authority (FCA). Fusion is given permission to provide regulated products and services. Fusion Asset Management LLP was established in May 2004 as an Institutional Asset Manager. Since then, the business has evolved into a diversified group of financial companies which provides corporate risk management advice, retail financial advice, wealth management for High Net Worth Individuals as well as continue to run institutional investment products and services.