ILS growth to continue, no longer a niche asset class: ILS fund managers

by Artemis on November 4, 2016

The insurance-linked securities (ILS) market is poised for future growth as the demand for risk transfer across the world is expected to increase, while the sophistication of the market and its investor base suggests it’s no longer a niche asset class, according to a number of ILS fund managers.

The flow of ILS capacity into the global insurance and reinsurance industry is expected to continue, with continued investor demand and sponsor appetite suggesting the space is poised for substantial long-term growth and is no longer the niche, alternative asset class of days gone by.

This is the message from a number of ILS market players that recently spoke with reinsurance broker Aon Benfield as part of the firm’s September, 2016 ILS Market Report.

During the last eight years the re/insurance and ILS space has been dealing with a near-zero interest rate environment, explains Brett Houghton, Managing Principal, Fermat Capital Management, LLC.

“ILS has experienced significant growth during this time as the asset class provides attractive risk adjusted returns without expected loss correlation to financial assets.

“We expect investor interest to continue to expand into the future as ILS has developed beyond a niche asset class and now provides an important component of portfolio diversification for a broad range of institutional investors,” said Houghton.

Testament to the increased maturity and sophistication of the ILS investor and ILS fund/manager, Houghton feels that the asset class is no longer viewed as a niche asset class, but more of a mainstream, viable investment that adds vital diversification and uncorrelated benefits.

Broader insurance and reinsurance market headwinds and the resulting softening market cycle have undoubtedly impacted the ILS space, contributing to lower returns, reduced cat bond issuance, and ultimately a slowdown in ILS market growth.

That being said, and as highlighted by Aon Securities earlier this year, the reach and depth of alternative reinsurance capital continues to grow, just at a slower pace than in the last few years and as varied sub-sectors going through their own cycles, such as the rise of collateralised reinsurance during a time of compressed cat bond issuance.

Robert Lindblom, Chief Executive Officer (CEO) and Partner of Entropics Asset Management AB, commented on the benefits ILS brings to investors, noting that further growth is very likely for the space.

“We believe that most investors turn to ILS products because of the uncorrelated nature of the asset class, rather than the generally low interest rates. Compared 
 to many other alternatives and lowly-correlated asset classes, ILS products have an advantage in being fundamentally uncorrelated and having a built-in protection against inflation and increasing interest rates, as the collateral is invested in short-term money market instruments,” said Lindblom.

The demand for ILS investments from capital markets investors appears to remain strong, and industry leaders that spoke to Aon Benfield suggest that this will continue in both the near and long-term.

The low correlation and diversification benefits seem to be keeping investor appetite for ILS high, despite returns falling when compared to previous years, suggesting that the market is no longer a niche investment for institutional investors, but a viable, and sound component of their overall investment portfolio.

Looking forward, Daniel Ineichen, Fund Manager, ILS, Schroders, said; “It is important to have the capital market segments being considered as long term capital and not an opportunistic play. Also, it should not be considered as a play for peak risks only. Hence, it needs to be nourished throughout the cycle.”

While Gregor Gawron, Head of ILS at Lombard Odier Investment Managers, concluded; “The growth in world population and the increased wealth accumulation in exposed regions will certainly lead to a greater demand for protection in the long term. In one way or another, this trend will have a positive spillover effect into the ILS market. In the near term, assuming no major events and continued low to negative interest rates regime, I see a saturation coupled with some sort of wait and see condition.”

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