Diversification drives ILS investor allocations more than returns

Investor allocations to the insurance-linked securities (ILS) and reinsurance linked investments space are driven more by the diversification and relative lack of correlation than by the absolute returns achievable, according to a survey.

Investors cited the diversification benefits of the ILS asset class, so insurance and reinsurance linked investments, as the main attraction and driver for investing in the space, according to responses to a recent survey run by Willis Towers Watson (WTW).

The survey overall shows that enthusiasm for ILS both as investment and efficient form of reinsurance or retrocessional protection remains strong, that ILS is seen as a positive component of the global risk transfer market and that continued growth of ILS is expected.

Of particular interest is what attracts investors to ILS, especially given the constant discussion of pricing in reinsurance and retrocession markets.

25 end investors in ILS responded to the survey, largely pensions and other major institutional investors. They were asked what motivated them to allocate capital to ILS and what they find so attractive about insurance and reinsurance risks as an asset class.

The overriding sentiment is that large investors such as these find significant value in the diversification and relative lack of correlation, that ILS offers to them compared to the multitude of other asset classes they allocate funds to.

As a result, investment decisions in ILS are not solely driven by returns, as portfolio diversification benefits are as much if not more of a driver for institutional investors allocating to the ILS space.

WTW explained, “End investors perceive diversification and noncorrelation with financial asset classes as key drivers. Indeed, relative yield only ranked fourth as a motivation for investing in ILS.”

In fact, 96% of respondents to the WTW survey cited portfolio diversification as their primary motivation for investing in insurance and reinsurance linked investments.

At the same time, only 12% are primarily focused on the yield or return of their ILS investments and overall this motivating factor for allocating came in fourth, after diversification, noncorrelation and cost.

Of the investors surveyed around two-thirds have been invested in ILS for more than five years, so it is interesting to see that two-thirds of those surveyed intend to maintain or increase their investments in the future as well.

This suggests satisfaction with the return levels achievable in the ILS market, even though it’s not the primary driver of allocations.

WTW confirms this, as the majority of ILS investors surveyed said they are happy with the current level of returns.