CAT Bonds and ILS: Three Manager Selection Pitfalls

CAT Bonds and ILS: Three Manager Selection Pitfalls

As we pass one of two major annual windows for contract renewals in Insurance-Linked Securities, asset owners are watching closely to see whether the recent rise in premiums will be sustained or reduced. Multiple investment consultants have urged investors towards CAT bonds and ILS during the first half of 2018. Yet bfinance research emphasises that asset owners should handle the choice of ILS strategy and manager selection with caution.

CAT Bonds and ILS


Manager selection and choice of sub-sector are critical to returns in CAT bonds and Insurance-Linked Securities.

The paper begins with an educational overview of the sector, including jargon busters, explanatory diagrams and clear definitions. This is followed by a discussion of several pitfalls that investors can encounter when selecting fund managers based on recent bfinance experience.

Funds today appear to fall into two camps: those that have maintained a consistent level of risk, and those that have prioritised returns through a decade of compression, often by moving down the risk tower.

CAT Bonds and ILS


Recent manager selection research at bfinance has provided an up-to-date view on the variety of strategies and managers that are now available to investors seeking CAT bonds and ILS. Yet it has also highlighted challenges.

These include: capacity for inflows, including changes in strategy as funds grow in size; the handling of non-performing contracts and the use of side pockets; and, last but not least, the potential for conflicts of interest – an issue which has become increasingly significant with re/insurers becoming more active on the asset management side.

While far from comprehensive, we hope that this discussion of potential pitfalls may be thought-provoking for investors that are considering or are active in this space.

Important Notices

This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.