Responsible investment aspects of cat bonds
As cat bonds were construed to isolate the insurance risk from other risks, such as counterparty risks (see our description of how cat bonds work), traditional ESG risks are small or very small when it comes to cat bonds. The risks that do exist mostly concern governance risks. These include the risk of corruption as the collateral is managed, or that interest bearing instruments fail if a currency is in jeopardy. Concerning liquid cat bonds, that are structured in established domiciles, and whose collateral is exclusively invested in AAA-rated instruments, these risks are negligible.
A more tangible risk is what can be described as reputation risk. If a bond triggers following an event and Entropics’ shareholders face losses due to a reimbursement to a purpose they do not sympathize with, questions regarding the legitimacy of the asset class could be raised. Entropics’ view on responsible investments is thus that the underlying insurance purpose is the single most important aspect of a responsibility analysis of a cat bond.
Entropics’ main strategy: exclusion
Based on our fundamental view that the underlying insurance purpose should be the main component in responsible ILS investments, Entropics means that a strategy of exclusion of bonds without a satisfying purpose is the natural starting point. Our policy for responsible investments include elements from other strategies, mainly norm based screening of companies seeking insurance protection. Within the liquid cat bond segment this is largely unproblematic and Entropics currently analyses the possibility to extend the use of norms based screening and its consequences when investing in, for example, collateralized reinsurance.
Please also see our extended text on strategies for responsible investments and how these strategies relate to cat bond investments.
Examples of excluded investments
Most bonds within the liquid cat bond segment are unproblematic from a responsibility perspective, as they mainly provide general property reinsurance against large natural catastrophes, mostly hurricanes and earthquakes. There are, however, examples of more problematic bonds.
For business reasons, Entropics does not publish names of bonds that we have been offered to invest in. The following are, however, examples of real transactions that have been considered by Entropics and that have been excluded as a result of the policy on responsible investments (in some cases the bonds could possibly have been excluded for other reasons as well):
- Market risk for fossil energy production
- Insurance against jack pots for online gambling companies
- Facilities for extraction of coal and oil
- Fossil energy production
- Insurance risks for life settlement (the practice of buying life insurance policies from economically exposed persons)