ILS investors show preference for catastrophe risks in survey

by Artemis on February 10, 2017

A survey of 100 institutional asset allocators reveals that over the next 12 months investors in the insurance-linked securities (ILS) space have desires to increase their exposure to natural catastrophe risks, and reduce their allocation to non-catastrophe risks.

This is according to a survey and resulting report from Clear Path Analysis, which explores trends in the ILS investor community and what this could mean for the market’s future.

The survey asked the group of institutional asset allocators, which includes existing ILS investors and potential allocators to the space, what increase in allocation to various risk areas they anticipate over the next year, and which they expect to pull-back from.

Overall, so for all investors surveyed, respondents anticipate increasing their exposure to non-catastrophe risks by 13.9%, and decreasing their allocation here by 23.1%, resulting in a net difference of -9.3%, over the next 12 months.

The decline in non-catastrophe risk allocation becomes even greater when considering responses from the sub-sector of investors already active in ILS. With an expected increase of 18.8% and a decrease of 37.5%, resulting in a net difference of -18.8%.

In contrast, the sub-sector of investors already active in the expanding ILS market anticipate increasing their allocation to natural or catastrophe risk by 40.6% over the 12 months, and reported an expected decrease of 15.6%, resulting in a net difference of 25%.

Similarly, the entire group of those surveyed anticipate increasing their natural catastrophe risk allocation by 28.7% in 2017, and decreasing their allocation by 18.5%, resulting in a net difference of 10.2%.

Given recent trends in the global reinsurance market and the alternative capital space the results are perhaps a little surprising, but might signal investor maturity and discipline.

Rates in the global reinsurance and ILS market remain under significant pressure, and the property catastrophe space, where ILS is most prominent and influential, has experienced the steepest declines in response to the benign loss environment and influx of capacity, from both traditional and alternative sources.

In response to high competition and declining yields, it’s been reported that ILS capital is increasingly looking to access risks outside of the catastrophe arena, looking to other, less pressured, potentially more profitable lines of business, while reducing its concentration on catastrophe exposures.

Clear Path Analysis highlights this point in its report; “Within the last year or two we have seen a significant increase among the major ILS-focused fund managers in
 their exposure to non-catastrophe risk such as specialty and lower-attachment property risks. The general impetus for this trend is the declining rates on natural catastrophe risk making alternative investments in reinsurance risk seem more appealing to these managers.”

But as evidenced by the survey results and highlighted in the report, it appears that overall; investors are keen to increase their allocation to catastrophe exposures but decrease their investment in non-catastrophe areas.

Providing some insight into why this might be the case, Clear Path Analysis said; “Perhaps investors are expressing a preference for their managers to stay focused on the ‘core risk’ for ILS? Alternatively, perhaps investors are still getting accustomed to the inclusion of new, non-catastrophe types of risk in their managers’ portfolios.

“In either case, investors’ interest in the varied types of ILS risk is certainly something to track in the next several years, as the market continues to expand and mature.”

Outside of catastrophe and non-catastrophe exposures the report highlights some other risk areas that investors will look to increase and decrease their contribution to over the next 12 months.

This includes their concentration on U.S. risk, which the entire group of investors expects to increase its allocation in by 23.1% and decrease by 13.9%, creating a net difference of 9.3%. For the sub-sector of existing ILS investors the increase totalled 18.8% while the decline anticipated was 25%, resulting in a net difference of -6.3%.

For life exposures the existing base of ILS investors expects to both increase and decrease their allocation by 3.1%. However, for all respondents the anticipated increase was 16.7% and the decrease 12%, resulting in a net difference of 4.6%.

Insurance Linked Securities - Asset Owner InsightsYou can purchase a copy of the Insurance Linked Securities – Asset Owner Insights survey report over at the Clear Path Analysis website (free for asset owners such as pensions, family offices, endowments etc).

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