Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

ILS funds expect 10%+ capacity growth over next five years


The majority of insurance-linked securities (ILS) funds are expecting their asset base to grow by more than 10% over the next five years, according to the results of a survey of the ILS market.

investment-growthThe ILS fund market is positioning itself for further growth in assets it seems, as ILS funds responding to a survey undertaken by insurance and reinsurance broker Willis Towers Watson (WTW) said they largely expect to expand their capacity over the coming years.

This ties in nicely with another finding that institutional investors are also increasingly seeking out ILS allocation opportunities, as sovereign wealth funds, pension funds and others continue to explore the potential for insurance and reinsurance linked assets to add to their overall portfolio qualities and returns.

WTW’s survey found that more than half of the end-investors surveyed already have a strategic allocation to ILS investments of between 2% and 5% of their total assets.

Encouragingly, two-thirds of them expect to maintain or increase their allocation, based on their experience with the ILS asset class to date.

It’s important to note that this survey took place a year ago, fielding responses after the key June mid-year renewal season when reinsurance pricing at that time was known.

As a result, it would be fascinating to know how this might have changed since, especially after the stronger rise in reinsurance and retrocession rates seen so far in 2019.

“The prospects for ILS are strong as this market becomes mainstream,” WTW explained, as respondents see the ILS asset class as less of an alternative and more of a staple investment.

Ceding companies are increasingly tapping into capital markets backed sources of reinsurance and retrocession, with 58% of cedants surveyed saying they already access ILS capacity.

On cedants, almost a quarter derive more than 30% of their capacity limit from the ILS market, a statistic that clearly shows how important ILS capacity has become and how integral it is to many buyer’s reinsurance programs.

Fronted ILS capacity on a traditional reinsurance or retro program is now the most common use of ILS at 71%, collateralized capacity on a traditional program is next at 53% and collateralized capacity backed by cat bonds next at 37%.

Boding well for the future, of the 42% not currently using ILS, 19% believe they will use the ILS market’s capacity in the next three years, with more of the respondents saying they will seek more information before making a decision.

That suggests a steady growth in demand for the ILS market’s protection, which is positive for growth prospects and likely part of what drives ILS fund’s bullishness when it comes to their prospects for growth.

WTW’s survey found that ILS funds themselves largely believe growth will come, with the vast majority of ILS funds spoken with anticipating capacity of over 10% in the next five years.

The survey also found that almost two-thirds of end-investors have been allocated to the ILS asset class for over five years.

WTW notes that, “This suggests that most pension and sovereign wealth fund managers understand the asset class’s risk profile and have reconciled it with their risk appetites and the relative impact of potential losses on overall fund performance.”

In fact, around 80% of these ILS allocators said that the performance of ILS funds in 2017 was aligned with what they had expected, given the scale of the catastrophe losses that occurred.

That suggests a mature and realistic investor-base, which is another good sign for future ILS market growth and stability over the longer-term.

WTW’s findings align well with comments made yesterday by Aon Securities Paul Schultz suggesting that ILS capital inflows are set to resume over the coming weeks and months.


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