A Wolf in Sheep's Clothing

Apr 2016

Today investors in certain ILS structures are cosily told about the risks that they will assume – non-correlated to the capital markets, well selected, well modelled and part of a well-diversified portfolio. Whereas it is doubtlessly explained that events can and periodically do occur, investors see from recent years that this is infrequent and the returns appear good. (Re)Insurers and fund managers will explain how they are able to source the best risk-return investments for the best-performing portfolios and how they always have the best interests of the investor at heart. The question today remains how true are all these comforting, woolly statements? Are investors really getting the risk-return they bargained for? Or are (re)insurers really the wolf, taking advantage of some investors' naivety and desire for return to raise negatively priced capital for their balance sheets? Hidden behind complex structures, it appears that investors are increasingly not aware of the risks they are assuming nor the cost to them of assuming those risks. This paper attempts to highlight some of the issues within various structures in order to allow investors to more fully understand the risks that they are assuming with these structures and to provide them the necessary background for performing the required due diligence prior to selecting the (for them) appropriate ILS investment structure.