German institutional investors to allocate more to ILS in 2021: Survey

Institutional investors in Germany are expected to expand on allocations to asset classes that exhibit lower levels of correlation to financial markets, such as alternatives and other credit specialties, including insurance-linked securities (ILS), a survey found.

In its annual investor survey, the Bundesverband Alternative Investments e.V. (BAI), Germany’s association for the alternative investments industry, found that private market strategies and alternatives are becoming increasingly mainstream and are expected to benefit from new asset inflows through 2021.

The survey covered some 77 institutional investors from Germany, including insurers, pension funds and schemes, who together manage around EUR 1.3 trillion of assets under management.

It found that investors are adopting increasingly balanced portfolios, across traditional and alternative investments and that the ultra low interest rate environment is driving some of this change, but also the wealth of alternative opportunities now available.

“The positive experiences of the last few years also contribute to the significantly increased allocation and an expansion of the range of private market products in particular. One of the core messages of the survey is that German institutional investors are gradually catching up to their international peer group,” the BAI explained.

German institutional investors are expected, on average, to expand their alternatives allocations to 26% of their portfolios, up from 22%, just in the next three to five years.

“This corresponds to an estimated annual growth rate of the entire alternative investments industry of 3 % to 6 % in the next three to five years,” BAI Board Member Andreas Kalusche said.

This is positive for the ILS and reinsurance linked investments sector, as such instruments can offer a familiar source of returns (the insurance industry) with alternative benefits (the lack of correlation and diversification offered).

Overall, some 7% of respondents said that they expect to shift into or increase allocations to so-called credit specialties, which includes insurance-linked securities (ILS), over the next three years.

“Many investors state that they are willing to invest in infra-structure and real estate debt as well as credit specialties such as ILS for the first time in the upcoming years,” the BAI said.

The BAI expects that ILS investing in Germany will “grow further” in the coming years, with an increasing number of institutional investors looking to the asset class as an alternative investment.

This “credit specialties” bucket, where the BAI categorises ILS, is currently a tiny proportion of the German institutional investor allocation to alternatives, typically.

Which suggests it is an avenue for considerable growth, as investors in the country become increasingly familiar with ILS as an asset class.

In fact, this bucket is one part of investors portfolios that is not expected to shrink at all over the coming years, as investors increasingly come onboard to allocating to securitised alternatives such as ILS.

As we explained recently, institutional investors are showing a pent-up demand for alternatives right now and asset classes that can offer the benefits of low correlation and diversification are set to prosper from this.

Which means ILS and reinsurance will almost certainly come under increasing demand from investors over the next few years, no matter where the cycle turns.

There is a particular interest among some very large pension investors in liquid asset classes at the moment as well, which means catastrophe bond funds are also an area that could come under increasing demand going forwards.