Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Break-even year may push ILS investors to call for better returns


For insurance-linked securities (ILS) fund investors who faced their heaviest losses ever in 2017 (said up to $18bn this morning), another loss impacted year, even if breakeven, could be sufficient to cause them to call for better returns.

Speaking today during the 10th anniversary Munich Re ILS Roundtable event in Monte Carlo, ILS experts discussed what may happen if 2018 turned into another year of losses for ILS funds and their investors.

With recent weeks having thrown a flurry of events at the insurance market, the impacts of catastrophes such as typhoon Jebi and now also the chance of perhaps more significant losses from hurricane Florence and potentially Isaac, the ILS market has gone from anticipating a year with benign loss activity to looking at one that could be more detrimental to its returns.

Chin Lui, Senior Vice President, Director of Insurance-Linked Securities and Portfolio Manager at investment house Amundi Pioneer, commented on this during the Munich Re panel ILS session.

He said “the market dynamic has changed a little bit in recent weeks,” adding that it now looks like the ILS market will be facing some losses, having been experiencing a relatively benign year so far.

“We were talking about an almost no-loss year three weeks ago, but clearly we’ve had the typhoon in Japan and we’re looking at Florence just right now.

“So I guess we will be facing some losses (from an almost no-loss year).”

The market is braced for some attritional level of losses from typhoon Jebi and hurricane Florence looks like it could drive more (or much more depending on the landfall area and strength). With hurricane Isaac also threatening Caribbean losses, the outlook for the year has changed.

“If this is going to be, sort of a break-even year (from more losses) I do think investors may be pushing a little more for a return, given if it’s two years of disappointment in a row,” Liu explained.

Continuing, “Probably you will also see more capital being trapped, if we have another let’s say a $10 billion plus event this year due to Florence.”

He also noted that given broader investment and financial market dynamics, investors may have more options available to them and if ILS returns are poor it could deter some investors in reloading so fast or so much.

Liu described the market dynamic as, “Investors probably have a little less motivation to move into ILS, driven by opportunities in emerging market and other places.”

“I think there will be more dynamics, but I just don’t expect investors will move in as aggressively as what we observed in 2017.”

As with 2017, the loss picture at the moment looks like it would be stacked against the collateralized market, quota shares and perhaps sidecars right now, but hurricane Florence’s threat could change that and also bring the catastrophe bond market into play.

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