Enthusiasm for ILS intact, seen as positive for market = growth expected

Among the three key stakeholder groups in the insurance-linked securities (ILS) market, cedants (both insurance and reinsurance), ILS fund managers and ILS end-investors, enthusiasm for the asset class as well as the protection it offers hasn’t waned, despite recent loss activity.

This enthusiasm for ILS is underscored by the findings of a recent survey by Willis Towers Watson (WTW) which found that almost all reinsurance firms and other cedants view ILS and the capital markets as a positive factor in the market and as a result anticipate seeing further market growth.

Reinsurance and retrocessional cedants and the ILS funds all believe that the ILS market will continue to grow, which is expected to be partly through increased usage of the capital markets as a source of protection, partly by expanding coverage to risks outside of property catastrophe (including areas such as property per-risk, cyber, and marine), WTW said.

At the same time, both the investors and cedants, continue to show appetite for such transactions and the coverage that they provide.

The end-investors in ILS also confirm that they see reinsurance as an established asset class, suggesting that allocations will continue to expand.

Also of note, WTW said that its survey results reflect opinions that are “counter to some observations that rising asset yields would deter new capital inflows to ILS.”

James Kent, Global Chief Executive Officer of Willis Re, commented on the survey’s findings, “The industry has widely reported the growth in the ILS market and this comprehensive survey further supports the development of ILS as an asset class despite the challenges of the catastrophe events in 2017.

“From a Willis Re perspective we see a divergence in the intent of (re)insurers to utilise ILS capacity largely driven by client type.

“For growth to continue, ILS investors will need to demonstrate the ability to innovate and provide optimal solutions to meet clients’ evolving needs. Furthermore the trust language, where used, will need to reflect a closer alignment with clients’ expectations. The ILS investors with longstanding and successful track records, supported by consistent and well-regarded management teams, are the ones best equipped for future success.”

The survey highlights some interesting data points on the industry, including the fact that greater uptake of ILS and capital markets reinsurance solutions is to be expected, as cedants are appreciative of the cover it provides.

At the same time numerous cedants report having collected on their ILS protection, serving to underscore the fact that the coverage works and responds when the buyers need the capital it provides.

Even more positive is the finding that more than half of cedants who do not use ILS coverage would consider doing so, at some point over the next three years.

While encouragingly, the end-investors have not been deterred by the losses experienced in 2017 and largely saw their ILS portfolios performing as they would have expected.

All of this points to a market still set to achieve growth based on uptake and adoption, not just expansion, which is positive for the marketplace but also potentially negative for traditional reinsurance firms, who may lose more market share.

ILS fund managers are largely bullish about their prospects as well, with the majority expecting to achieve at least 10% of growth in their ILS assets under management over the next five years.

Some highlights from the survey include:

• 58% of responding cedants use some ILS capacity, with one in four deriving more than 30% of their capacity from ILS.
• Over half of non-users would consider adopting ILS capacity over the next three years.
• Close to half of ILS buyers surveyed have recovered claims under their contracts. Almost all reported the collections as a positive experience.
• Over half would consider using ILS for non-property cat risks, either as part of a multiline cover or on a standalone basis. 13% have already done so.
• 2017 catastrophe losses have not deterred end investors. 80% agreed that 2017 ILS funds’ performance was in line with expectations.
• End investors perceive diversification (96%) and non-correlation with financial asset classes as key drivers. Relative yield ranked only fourth.
• More than half of end investors have strategic allocations between 2% and 5% of total assets; two-thirds expect to maintain or increase their allocation.
• Post 2017 losses, almost half of end investors (48%) tactically increased their ILS allocation. Another 16% allocated capital to rebalance ILS to its long-term strategic weight.
• Only 20% of end investors made reductions; post-loss redemptions were few.
• ILS funds anticipate further growth over the next five years, with the vast majority expecting this to grow more than 10%.
• Only a third of ILS funds appoint independent third-party valuation agents for illiquid (Level 3) assets.