ILS investing to expand in Japan, as alternatives & ESG focus increases

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Investing in insurance-linked securities (ILS) and other reinsurance linked assets that are broadly uncorrelated with wider financial markets are gaining in appeal, as alternative asset class allocations grow and a focus on ESG quality assets increases.

Japan imageInsurance-linked securities (ILS) and other reinsurance assets, from catastrophe bonds, to ILS funds, sidecars and other vehicles, are all gaining an increasing profile in Japan.

Japanese pension funds have been investing in the ILS asset class for more than a decade, but now it’s reported that interest in investing in ILS is becoming increasingly widespread, in particular among corporate pension funds and regional banks.

In Japan, “insurance-linked products, which can offer liquidity and attractive income despite their low correlation with traditional asset markets, have become more widespread,” alternative assets data provider Preqin reports.

Preqin says that Japanese investors, largely institutional in nature, are increasingly seen to be searching out returns that display a lack of correlation with the wider economy and financial markets.

As a result, any alternative asset class such as ILS and reinsurance is gaining increasing attention right now, even after the two year’s of catastrophe losses suffered.

Much of the focus on alternatives has always been on domestic investment fund managers, but Preqin notes that the Japanese investor-base is steadily expanding its search for appropriate asset classes and managers, with an increasing amount of alternatives allocation heading offshore.

In addition, environmental, social and governance (ESG) factors are increasingly driving allocation decisions for Japanese investors, especially in the pension fund sector.

This bodes well for the ILS fund space as well, given the provision of disaster risk financing, which is essentially the mandate of much of the reinsurance and ILS sector, is well-aligned with the United Nations sustainable development goals (SDG’s), which has led to some pension funds identifying the ILS asset class as an example of a Sustainable Development Investment.

All of these factors should help to increase awareness of ILS and reinsurance as an asset class in Japan, which in turn should bring more investor interest in the ILS fund space as a result.

Out of 303 alternative investment institutions in Japan, Preqin said that two-thirds already allocate to at least one alternative asset class.

Jie Sin Chia, Head of Asia Products at Preqin said, “A persistent low-interest environment set by the central bank, as well as stagnant growth in recent years, have put enormous pressure on Japan-based investors as they look to meet their returns targets. Alternative assets have long been a part of the investment landscape in Japan, but the industry’s ability to offer diversification and long-term yield have brought them to the forefront of investors’ minds. While they are clearly looking for opportunities to allocate to the rest of Asia, North America and Europe, in most asset classes investorsremain primarily focused on domestic opportunities. We are likely to see this shift if the low-interest and slow-growth environment remains in place.”

Preqin found that interest in establishing an ESG policy to drive allocation is increasing as well, with 71% either already having established an ESG policy in their mandates to alternative assets, or are planning to include one within the next five years.

ILS ticks all the boxes for these Japanese institutional investors regarding alternatives, as a diversifying, relatively uncorrelated asset, that exhibits strong ESG qualities and characteristics as well.

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