Issues around climate change are legion – and one of the areas that often gets discussed the most is how much adaptation, mitigation, and resilience planning will cost. However, says Jitzes Noorman, Senior Delegated CIO & Investment Strategist, Columbia Threadneedle Investments EMEA APAC, another part that must be looked at is how this could affect investment appetite.
Noorman was speaking at the ‘Risk Mitigation with Insurance Linked Securities: 2023 Outlook for Institutional Investors’ roundtable, hosted by Clear Path Analysis, in association with Tangency Capital, which has been released as a report. In it, ILS experts from Risk Management Solutions (RMS), Egan-Jones Ratings Agency, and Albourne Partners discussed the key issues in ILS – particularly for those around climate change.
“Do we understand the complete chain from a reinsurance company to cat bonds, and how all the bonds are structured, and the risk is assessed?”
Noorman was asked, as investors begin to take climate change into consideration long-term for their financial planning, and given rising premiums, which ILS model best mitigates risk and adds value for investors.
“Before investing, several questions are often raised First of all, there is complexity,” he said and aligned this point to the ideas around what the main questions that are addressed by end investors when they first start looking at CAT bonds as an asset class are.
“Do we understand the complete chain from a reinsurance company to cat bonds, and how all the bonds are structured, and the risk is assessed?” he said around the complexity. “Do they feel comfortable with the complexity of the asset class?”
Linked to that is reputational risk, Noorman added. “The pension funds invest money of the pension participants, but should things go wrong in the markets, and you’ve got negative performance, then you should be able to explain to them that you’ve invested in bonds linked to natural disasters – which might sound a bit dramatic.”
This meant the main question that clients were asking asset managers from clients was about climate risk.
“We see the news of hurricanes in the US and other parts of the world, and it’s an important and relevant topic, but I think it can be addressed through education and communication,” he said and stressed that the answer is that “climate risk is, of course, already a well-known theme that the natural catastrophe models in this market as well as the bonds take account of”.
“The markets are diversified across different perils, and not all perils have
the same climate risk exposure.”
Whilst much of the futureproofing discussions around ILS focus on worsening storm risk, higher ocean levels, and the associated risk to coastal communities - there are other areas that institutional investors must look at to get a full set of facts, he said.
“The markets are diversified across different perils, and not all perils have the same climate risk exposure,” said Noorman. “For instance, earthquakes are completely de-linked with climate change.”
"Any new insights regarding climate risks will very quickly be priced into the
markets and mitigates the price risk linked to climate change.”
Importantly, he said, this asset class has a rather short maturity compared to other fixed-income asset classes - three years on average. “Which means that every year one-third of the bonds expire,” he said.
“So, any new insights regarding climate risks will very quickly be priced into the markets and mitigates the price risk linked to climate change.”
