Pension funds appetite for alternatives increases, positive for ILS

A significant number of pension funds show an increased appetite for investment risk and alternative asset classes, according to State Street, which could result in more allocations to insurance-linked securities (ILS) or reinsurance linked investments,

As reported previously by Artemis part of the reason the alternative asset class space, which includes ILS, catastrophe bonds and reinsurance linked investments, has witnessed continued growth is down to institutional investors, like pension funds, increased shift towards the market.

State Street’s study further validates this transferal of allocations towards alternative investments, highlighting the amplified pressures pension funds are currently under as they search for greater market stability amidst increasing market turmoil.

Part of the report reads; “To achieve the returns they need, they have to take on more risk” and this is exactly why pension funds and other institutions are becoming a more common entity within the alternative asset classes and as a result ILS and reinsurance.

ILS, catastrophe bonds and traditional/alternative reinsurance’s low-correlation with the broader financial markets enables investors and institutions alike to benefit from the returns of a diversified risk portfolio, while offering higher returns than the typical markets are currently offering.

Along with benefiting global investors, a shift towards alternatives will be good for the ILS asset class, with international pension assets worth in the region of $30 trillion, as we mentioned in a prior article on this issue.

In comparison to this figure non-traditional and ILS reinsurance capacity is relatively small (at around $60 billion or so), meaning there’s ample room for growth and State Street’s findings point to just this revealing that 60% of pension funds will look to increase their exposure to alternatives such as private equity, while also looking to real estate and infrastructure.

State Street Corporation’s recent publication does have an emphasis on pension funds, but as we reported some time ago sovereign wealth funds, endowments and foundations, insurers, hedge funds and cash-rich corporates have also showed an appetite for alternative investments. So one could assume that greater market volatility will push more and more capacity towards the ILS space as knowledge and understanding of reinsurance as an asset class grows.

A report published by international consultancy firm McKinsey & Company in August 2014 discussed the growth of the asset class and its wider acceptance throughout the investor space: “The mainstreaming of alternatives is now driving a “trillion-dollar convergence of traditional and alternative asset management. Leading hedge funds, private equity firms and traditional asset managers – which to date have occupied distinct niches in the investment management landscape – will increasingly battle for an overlapping set of client and product opportunities in the growing alternatives market.”

The asset qualities offered via alternatives such as ILS and reinsurance has been apparent for some time and studies like State Street’s show that large investors see this market as more than just providing higher returns. As pension funds and other large institutional investors involvement in the alternative space grows we predict this will have a knock-on beneficial effect to the ILS, catastrophe bond and reinsurance linked investment space.