Investing in Insurance Liabilities for Insurers - Industry Report
Insurers have a big advantage when investing in life and P&C insurance liabilities, as they understand the nuances and complexities of insurance risk—which is why more are reaping the rewards of investing in a growing non-catastrophe insurance-linked investments market. Rob Hauff, portfolio manager for alternative reinsurance and investment platform Vesttoo, examines the pros and cons of such a strategy.
The growth trajectory of non catastrophe life and P&C insurance-linked investments has been particularly steep in recent years, and the use of these instruments has revolutionized the re/insurance market.
Yet while most of the biggest insurers and reinsurers use these instruments to discharge risk, the asset side of their balance sheets has been slower to absorb it as an investor.
That is now starting to change, especially as the nature of the risks being transferred is broadening. While the market remains dominated by instruments transferring binary, catastrophe-focused risks to investors, an increasing volume of high frequency, low severity life and P&C insurance liabilities is opening the door for a new asset class offering more consistent returns over time.
This is a relatively untapped volume of opportunity for the capital markets, which could be sizeable and provide an interesting diversification play for a number of new and old investors, including insurance companies.
As Rob Hauff, portfolio manager for alternative reinsurance and investment platform Vesttoo, explains: “The insurance industry is a perfect fit for somebody already speaking that language. Insurers have in-house expertise—a resource that can be helpful in explaining structural nuances, regulatory issues, underlying risk, and the strategic rationale for transactions.