Continuous disciplined institutional ILS capital growth expected: Leadenhall’s Volpi

The insurance-linked securities (ILS) market is expected to continue attracting new investors, leading to continuous growth, while even more investors from around the world are also increasingly getting familiar with the asset class, Lorenzo Volpi of Leadenhall Capital Partners explained in a recent interview.

Volpi, the Head of Business Development and a Managing Partner at specialist ILS and reinsurance linked investment manager Leadenhall Capital Partners believes the ILS industry is back on a positive track towards growth and expansion after overcoming recent more challenging catastrophe loss years.

Explaining market dynamics since those peak loss years, Volpi explained, “The frequency of cat events occurred since 2017 proved to be a wakeup call about the risks associated to the asset class (after a great run with very few material cat events between 2006 and 2016) but those events also helped the market to become more attractive on a risk adjusted basis with spreads that have widened for four straight years and pricing back to levels not seen since 2012/13.”

Improved pricing, alongside the work undertaken in the ILS market to harden portfolios and negotiate more favourable terms, have helped to rebuild investor confidence in the sector, leading to improving prospects over the last year or so.

Volpi said that, “Large institutional investors continue to back insurance non-life insurance linked investments because they continue to appreciate the diversifying benefits that it provides to the wider portfolio allocation.

But added that, “Most importantly the asset class (especially cat bonds) proved resilient through the covid-19 pandemic and reinforced its benefits as investors continue to build more diversified / less correlated alternatives portfolios.”

As a result, investors are increasingly focused on making ILS a strategic asset class within their alternatives, which means they are likely to allocate for the long-haul.

But importantly for the market, Volpi also sees new avenues of investor interest as well.

“Insurance linked investments are now deemed to be strategic and long term,” he continued. Adding that now, “Investors across different regions, that are new to this space, are getting more familiar with it.

This increasing familiarity with ILS among institutional investors around the globe has been a slow and steady process over the last two decades, but Volpi feels awareness and understanding continues to expand, which is positive for the prospects of future inflows to ILS fund managers, such as Leadenhall.

The global ILS investor base continue to expand and while there’s been some shifting in priorities for investors, not least related to the pandemic, the value-proposition of ILS investing remains strong.

At the same time the global insurance market continues to expand and with heightened risk awareness and evident volatility in the climate, the need for capital is not going to lessen.

Leading Volpi to say that, “Overall the expectation is for a continuous disciplined institutional capital growth that can efficiently match the yearly increase of penetration of reinsurance and its demand for reinsurance capacity.”

Environmental, social and governance (ESG) related focus among investors and opportunities related to climate risk, are both seen as key drivers by Volpi.

“(Re)insurance provides positive social benefits to the society and investors are taking an active interest in how non-life insurance linked investments can support the growth of ESG investing,” Volpi explained.

Adding that, “Climate change is a key topic and ILS is one of the very few asset classes that should be able to price it, with pricing that should adjust more rapidly than climate risk.

“This provides an immediate opportunity to investors, thanks to a time horizon mismatch between the short tenor of the investments (one to three years) vs the impact on climate that is more likely to be a multi decade phenomenon.”

He further explained that, as a result of this, “Investors should expect higher premiums for a future expected increase in potential claims as a consequence of climate change.”

Read all of our interviews with ILS market and reinsurance sector professionals here.