ILS portfolio expansion a matter of price & terms: Investors at ILS Asia

All of the pieces are in place for growth in the insurance-linked securities (ILS) asset class across the Asia region, it’s just a matter of time, as well as pricing and terms of available investments, according to a panel of experienced pension fund investors who allocate to the ILS sector.

Asia is home to a wide range of natural catastrophes which drive substantial overall losses year-after-tear, yet insurance penetration remains dangerously low across the region.

As a result, Asia’s vast protection gap (disparity between economic and insured losses post-event) is well known and for the insurance, reinsurance and ILS sectors, represents a huge opportunity to expand into new peril regions while providing valuable protection to individuals and societies.

For investors, access to Asian cat risk offers diversification within their ILS portfolio, but to date, sourcing new perils or business from Asia, with the exception of Japan, has lagged other parts of the world.

In light of this, panellists at our recent virtual ILS Asia 2021 conference, held in association with our headline sponsor AM RE Syndicate Inc., offered their views on the need for diversification within an ILS portfolio, with a view to sourcing Asian cat risk.

This discussion can now be viewed on-demand here.

“I think in principle we’re definitely open to that,” said Eveline Takken-Somers, Senior Director, Lead Portfolio Manager – Insurance Portfolio, PGGM. 

“When we look in our portfolio we believe it’s really important that risk is well modelled and that it’s well priced for. And if you have these two elements, we’re not waiting to then enter that market.

“I think today, there’s still some challenges also in these two. So, both pricing as well as maybe building standards. But I think it’s just a matter of time before that market will basically mature, and then would be a real candidate for an ILS investor to diversify their portfolios.”

While diversification within an ILS portfolio is beneficial, many investors take a concentrated approach on the basis that the ILS portfolio itself diversifies a much broader asset portfolio.

This point was highlighted by panellist Craig Dandurand, Head of Debt, Future Fund of Australia, who explained that what his firm wants is the best risk and the pricing in the sector.

“We don’t necessarily want to have something else that we think is going to be a net money loser just to diversify the portfolio, it isn’t all that helpful.

“At the same time, it’s very easy to draw a case of Asia in growing in terms of insured value, in terms of the potential for data gathering, the potential for all of the modelling considerations that you’d want to have, the potential for an accumulation of risks that needs to be laid off someplace else that can be done at a mutual benefit for both the cedent and the reinsurer,” he said.

Adding, “So I think all of those components are absolutely in place for growth in the region over time. It’s just a question of pricing and terms.”

Bernard van der Stichele, Portfolio Manager (ILS), Fixed Income & Derivatives, Healthcare of Ontario Pension Plan (HOOPP), told the audience that in principle, he would definitely be open to more cat risk coming out of Asian cedents, but agreed that pricing and modelling are key components.

“The risks must be quantifiable and the modelling must be credible, and the pricing must be in line with other risk pricing. If you take the nature of the event out, on a risk unit basis, is it priced as well as any other cat risk.

“Those are the two key components. I think the regulatory environments are important as well. Are these markets giving us the protections that we expect etc. And ESG considerations will also definitely help in any decision,” said van der Stichele.

You can watch this session of ILS Asia 2021 on-demand here.

As well as the on-demand playback, we will be archiving every session from our online and virtual ILS Asia 2021 conference over on our YouTube Channel in the coming weeks and audio versions will also be uploaded to our podcast which you can subscribe to here.

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