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Institutional investors have a close working knowledge of the financial markets, but may have less familiarity with insurance markets. By combining its generalist investment consulting knowledge with its specific actuarial expertise in property and casualty (re)insurance, Milliman is well placed to serve as specialist investment consultants for the insurance-linked investment sector.
There are a number of ways in which Milliman can provide value to investors seeking to invest in insurance-linked securities (ILS) and/or collateralised reinsurance.
Investors must overcome a knowledge hurdle to gain comfort with any new alternative asset class. Milliman can provide institutional investors interested in learning about insurance-linked investments with insight regarding the major actors and instruments in the sector, the portfolio benefits and diversification potential, and the downside risks.
In addition, the relative novelty of the market for securitised insurance means that many investors are largely reliant on the expertise of catastrophe-focused hedge funds. Choosing the right fund to invest in is crucial, and the due diligence process is complex: Funds must be assessed not only as investment vehicles, but also as writers of insurance. Milliman can ensure that clients ask the right questions, understand the responses, and make more informed decisions during the due diligence process.
Once an investor has decided to pursue an allocation to the alternative capital sector, Milliman can provide ongoing assistance with performance measurement and portfolio re-balancing. These services may include (but not be limited to) benchmarking portfolios and performance against industry averages; providing insight into risk seasonality, insurance earning patterns, and other valuation considerations; and assessing an investor’s or fund’s ILS investment strategy in the context of their larger portfolio objectives.
A manager at a small catastrophe fund engaged Milliman to help optimise its portfolio, which included catastrophe bonds. Milliman worked with the fund manager to create a customised simulation tool to optimise the fund’s portfolio of insurance-linked securities, ensuring the mix of bonds met the risk requirements of the fund. In addition to offering more sophisticated insight into the portfolio's true risk profile, the fund manager used the tool to more thoroughly explain the details and peculiarities of this asset class to potential investors.