ILS “increasingly front & center” for investment & risk transfer: WTW

Insurance-linked securities (ILS) in their various forms are “increasingly front and center” when it comes to selecting risk transfer and investment options, broker Willis Towers Watson believes.

The insurance and reinsurance broker surveyed the ILS market, both cedant companies and investors, to take the temperature of the market, finding that the profile of ILS as an option for transferring risk and investing continues to grow, despite the impact of the two most challenging years for the asset class.

Insurance and reinsurance broker and advisory Willis Towers Watson (WTW) explained that the ILS market is expected to deflect the “body blows” of recent years, when catastrophe losses and loss creep dented returns and trapped investor capital.

Steps need to be taken to improve the transparency of ILS contracts, WTW says, to ensure they are well-understood by both sides from the off and that ambiguity cannot emerge during the contract period.

Some ILS products, particularly aggregate reinsurance and retrocession contracts, have performed poorly for the investors backing them, WTW’s report explains.

Resulting in the exposure level to such contracts, as well as the amount of loss creep seen and reported, becoming a drag on some ILS funds ability to raise fresh capital, the broker suggests.

There’s more to ILS investor allocation decisions than relationship, size of fund, analytics and the like, WTW believes, with these loss creep related material adjustments to losses likely to diminish the standing of some in the marketplace.

But despite the issues faced, the ILS market remains well-positioned to offer alternative solutions to cedants and opportunities to investors.

Cedants in general see the potential for ILS to expand its remit, with a majority of respondents to the survey saying they would look at ILS backed solutions for risk outside of property catastrophe.

In fact, around one in ten cedants have already explored the use of ILS solutions in areas away from the traditional property cat, according to the survey.

Alongside increasing cedant acceptance, WTW notes that, despite the issues faced in recent years by the ILS market, it “Cannot obscure the contributions to a positive market outlook that the growing understanding and acceptance of the risk/reward profile of ILS among pension fund trustees and other investors in more mature markets are creating.”

“It’s not an overstatement to say that ILS are becoming mainstream — rising through the insurance investment ranks from lightweight to middleweight,” WTW continued.

New challenges will be faced, as the ILS and collateralized reinsurance markets seeks to return to growth, the broker says.

Further explained, “These include enhancing how risk is directed in a mutually convenient way from cedants to investors, associated requirements such as educating (re)insurers about how ILS can contribute to an efficient (re)insurance program, and creating more innovative structuring solutions.”

In addition, the desire of the ILS market to expand and cover a wider range of risks and perils, will be best served by “matching cedants and investors that share compatible risk needs,” WTW believes.

Adding that the availability of risk models and the ability to value more exotic ILS assets will help to smooth this journey towards ILS market expansion.

But overall, the broker believes that despite its challenges the stature of the ILS market is growing still.

“What’s clear from our survey is that ILS are increasingly front and center in the ring of options for future insurance investment and risk transfer,” commented WTW.