Demand for insurance-linked investments here to stay: Willis Towers Watson

Demand from large institutional investors, such as pension funds, for insurance and reinsurance linked investments (such as ILS funds and catastrophe bonds) is here to stay and will help the asset class continue to grow, according to Willis Towers Watson.

In its latest Global Alternatives Survey, in which it looks at the world of alternative investments and covers 10 asset classes and seven investor types, global advisory, insurance and reinsurance broking and solutions company Willis Towers Watson (WTW) finds that insurance-linked investments feature meaningfully in the survey results for the first time.

It should be noted that this is just a survey or snapshot of the global alternative investment market, a market of around $6.2 trillion of assets under management, and so the ILS fund managers in the results have around $30 billion of insurance linked investments between them.

Artemis has a directory of ILS fund managers and reinsurer owned managers which between them have almost $65 billion of ILS assets under management.

But what is notable, is the fact that insurance-linked investments and ILS fund managers are featuring meaningfully in the survey data from Willis Towers Watson for the first time, reflecting the continued growth of the asset class and increasing attraction for pension funds to invest in ILS.

Almost two-thirds of the $30 billion of ILS assets featured in the survey is invested with managers in Europe, with 13 ILS fund managers showing up in the results this year.

WTW found from the survey that the growth of alternative beta type strategies and diversifying return drivers was more prevalent in this years results and insurance or reinsurance linked investments fit within this segment.

Institutional investors such as pension funds continue to allocate to insurance-linked investments (ILI) as a way to add diversity to their portfolios, WTW explains. Pensions funds in particular are increasingly accepting of ILS and ILI, resulting in greater inflows into the asset class.

WTW notes that the increased inflows has led some to suggest that capital will flow back of out of the ILS market after the next major catastrophe losses, or an uptick in interest rates.

However, the report states; “We believe that most of the institutional allocations in recent years were made for strategic reasons and that the institutional demand for ILI is here to stay.”

WTW notes the current softened state of the global reinsurance market and how this is also affecting insurance-linked investment funds and ILS players, saying that it’s not only a result of the inflow of capital markets money.

However, WTW has seen premiums stabilise more in recent months and expects this trend of reinsurance rate stabilisation will continue over the next 12 months.

One feature of the market as a result of the softened rates is that “ILI funds targeting higher returns, have seen increased competition and capacity constraints as a result of the broader “chase for yield”,” WTW explains.

However, “ILI funds targeting more remote and lower risk events are likely to continue to generate an attractive risk-reward ratio, as competition in this segment of the market is less given the high return requirements of the traditional reinsurance companies (who have a higher cost of capital),” WTW continues.

As a result of the competitive nature of the market currently, WTW believes that the larger and better-managed ILS funds will outperform their smaller rivals, using economies of scale to be able to cut out costs and source more attractive deals.

“We expect managers that have been selling overpriced ILI beta to come under pressure, with the more innovative and well-resourced managers continuing the flourish,” WTW concludes.

Among the top 100 alternative asset managers identified in the survey, allocations to insurance-linked investments are smaller, relative to other asset classes, WTW found.

ILS fund management specialist Nephila Capital features in the top 100 alternative asset managers for pension fund assets, with $7.422 billion of its asset base sourced from pension funds.

ILS and ILI do not feature in the top 100 alternative asset managers for insurance companies, sovereign wealth funds, banks, wealth managers or endowments, where ILS remains a more niche and still less well understood asset class.

In the total universe covered by the survey, ILS and ILI is well represented by 13 investment managers, including Nephila Capital, Credit Suisse Insurance Linked Strategies, LGT ILS Partners, Securis Investment Partners, AlphaCat Managers, Schroders, Twelve Capital, AXA Investment Managers, Blue Capital, OFI Global, Deutsche Asset Management, Pioneer Investments and Tages, with almost $30.15 billion under management.

The fact that the ILS asset class has appeared in the survey results with a stellar list of some of the leading managers in the space is testament to its continued importance as an institutional asset class and return driver.

With education about the asset class still increasing, the inflows from pension funds around the world are expected to increase as the opportunities to invest it allows.

As we wrote yesterday, there is growing interest and demand for insurance-linked securities in the Asia region as well.