80% of allocators to stay invested in ILS after losses, 37% to increase

According to the results of a new survey of 100 institutional asset allocators, the vast majority would choose to remain invested in insurance-linked securities (ILS) and reinsurance investments even after major catastrophe losses, reflecting investor confidence and the growing comfort they have investing in ILS.

The survey of institutional investors and their attitudes to investing in ILS and reinsurance is the second to be undertaken by Clear Path Analysis, following on from a survey last year the results of which showed that institutional investors wanted to expand their allocations to catastrophe risks, revealed some of the key challenges allocators face in ILS, and found that track record and returns are all-important in ILS fund manager selection.

The second edition of the survey results come after the largest catastrophe losses the ILS and collateralized reinsurance market has faced, as hurricanes Harvey, Irma and Maria and other loss events caused the majority of ILS strategies to face impacts, with some being hit with double-digit declines due to exposure to the 2017 catastrophe events.

The survey found though that ILS investors are largely confident enough in the ILS sector to continue to allocate their capital, despite facing losses.

The research found that allocators are increasingly confident in investing in ILS and the majority would remain invested even after a major hurricane loss.

U.S. weather related exposures made up the bulk, or 84%, of the surveyed institutional investor allocations, but still the investors see the value in remaining invested in ILS, with 80% saying they would not pull their allocations after major losses.

Artemis highlighted recently that large, institutional type investors are predominantly in ILS for the long-haul, with some citing the attractive 7% per-annum returns over the last ten years despite the losses of 2017.

In fact, the survey found that 37% of respondents would seek to increase their allocations in 2018, in order to benefit from the post-loss event environment.

Dirk Lohmann, Chairman and Managing Partner, Secquaero Advisors, commented in the report, “One should take a longer-term perspective when allocating to the asset class and be willing to tolerate a certain degree of volatility as long as it is within the projected margins that were indicated when they first made their allocation.”

Insurance and reinsurance carriers have been expected to offer higher returns to ILS investors, following the losses of 2017. This was seen at the January renewals, although rate increases were not what had originally been hoped for it transpires.

As a result, the survey report says, “Pension plans and other asset owners appear savvy to the opportunities and are sticking by ILS in the hoping of benefitting.”

“It is important for everyone to understand that if you stick to risks that have good data and modelling you can get a good verification of the price of the risk transfer,” Lohmann continued.

Following the major losses in 2017 and particularly the hurricanes, the report suggests that ILS investors will be keeping a keen eye on forecasts for the 2018 Atlantic hurricane season.

Berit Gehring, Head ILS Product Specialist at Credit Suisse Insurance Linked Strategies, explains in the report, “The question therefore is: has the 2017 hurricane season been exceptional or will 2018 follow with equal or worse hurricane activity, just like 2005 followed 2004? And was the high frequency of major hurricane landfalls in 2017 coincidence or climate driven?

“In general, based on insurance catastrophe modelling, the probability of having two hurricanes in one year causing insured losses of more than USD 20 billion each is around 1.4%, which is in line with the modelled historical hurricane losses. The probability of having three such hurricanes in one season is 0.1% or once in 1,000 years.”

The rest of the survey reflects growing confidence in insurance and reinsurance linked investing from institutional investors, at a time when many are looking to increase their allocations to alternatives, which bodes well for ongoing ILS market expansion and growth of assets for ILS funds and their managers.

You 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).