AP3 has been investing in different types of insurance-, climate- and weather-related securities since 2008. Holdings include catastrophe bonds, which are traded outside the traditional financial markets. Returns on these instruments have a low correlation with other investments, which means they help to diversify the portfolio.
Can contribute to expedient disaster relief
Several countries in South and Central America and other vulnerable parts of the world issue disaster bonds to secure financing in the event of serious natural disasters. AP3 is a leading investor in this type of bond. AP3 also participates in various initiatives such as the World Bank's Sounding Board for Famine Risk. By investing in and contributing to the development of new, more efficient, ways of transferring risk from vulnerable countries to the financial market, help can arrive faster and more efficiently, for example in the event of a famine.
Investments in insurance risk are strategic, long-term and help to make insurance markets more efficient. In this area, AP3 systematically takes on different types of insurance risk, for instance the risk of hurricanes, earthquakes or flooding. During years when disaster occurrence is low, we can expect to achieve good returns. In years when disasters are more prevalent, significant losses can arise. It is this risk that AP3 is paid to take on. Over time, the Fund expects to earn favourable risk-adjusted returns in this area.
Specialist competence and effective networks
AP3 has developed specialist competence in this area and built effective networks by connecting with strategic partners, universities and research institutions. This strategy illustrates AP3’s long-term approach and ability to conduct effective internal management of complex assets. This strategy looked attractive when first designed 10 years ago. In hindsight, it has more than matched expectations. The Fund has done well even in peak disaster years like 2011 and 2017. Analysing and tracking climate trends enables AP3 to make informed investment decisions. Climate change may be a rapid process geologically speaking, but from a financial perspective it is slow. AP3 invests in instruments with a average maturity of three years, which means that their pricing adjusts much faster than climate risk.
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