ILS, an asset class whose tailwinds are not economy-dependent


Regular readers will know that we’re proponents of investing in insurance-linked securities (ILS) and reinsurance linked assets, recognising the beneficial features of the ILS asset class and what it can offer to a sophisticated institutional investor.

tail-wind-sockAmong these are, of course, the relatively stable returns that can be achieved over the longer-term (strategy dependent and catastrophe loss activity allowing), the lack of correlation to movements of the global financial markets and the fact ILS offers a diversified source of returns for investors portfolios.

While these are the main benefits that tend to be the focus of insurance-linked securities (ILS) marketing documents, at this time of global pandemic and with the economic fallout from it still uncertain as to its severity, another positive feature of investing into ILS and direct reinsurance linked returns is currently being demonstrated.

At this time, the prospects for the majority of asset classes are perhaps more strongly than ever linked to the prospects of the global economy.

Many of the most popular alternative investment classes, such as infrastructure, private equity and real estate, tend to be economy-dependent to a degree, or at least linked to the trajectory of the global economy and the major economies of the world such as the United States and China.

In fact, a significant amount of the global investment universe solely derives their tailwinds for positive returns from economic activity and economic growth or expansion.

But in the case of insurance-linked securities (ILS), such as catastrophe bonds, reinsurance vehicles such as sidecars and other ILS structures, their tailwinds are actually derived from pure market dynamics such as supply and demand and right now those dynamics are creating tailwinds that make it a very good time to be an investor in, or to begin allocating to, the ILS asset class.

For one, capacity across the reinsurance and retrocession marketplace is expected to be more scarce over the next sets of renewals and likely also at year-end, presenting an opportunity for capital to have more control over terms, conditions and pricing than before.

The reinsurance market was already firming and now may be hardening, much more broadly than just across catastrophe exposures as well. This could provide ongoing tailwinds that help to drive rates higher.

At the same time the primary insurance market has also been firming, especially in the commercial and property space, with the trajectory of rates here set to help drive the reinsurance rate firming as well.

These drivers or tailwinds for the ILS market are not dependent on the economy recovering at pace from the Covid-19 pandemic, while at the same time there are some economic tailwinds that could emerge, including the fact that the cost of investor capital has risen given the broader hits to their investment portfolios, another tailwind for firming.

At this specific point in time, there are a wide-range of asset classes and types that global institutional investors are looking at for potential returns as the world begins to open back up and recover from the pandemic lockdown.

But the majority of these will derive their tailwinds from the economic recovery itself, not from a market cycle and supply/demand factors, unless that is also economically linked.

So, in this respect ILS and reinsurance-linked investments are relatively unique.

As there aren’t many other asset classes which also exhibit a current trend for increasing returns, but without being reliant on the economic recovery to achieve them.

It’s another small but positive factor about the asset class, that could drive more investor interest in insurance-linked securities (ILS) and reinsurance at this time, perhaps becoming positive over the longer-term for new inflows to the sector.

Artemis London 2022 - Insurance-linked securities conference in LondonTickets are selling fast for Artemis London 2022, our first ILS conference in London. Sept 6th, 2022.

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