Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Investors planning to allocate to ILS post-event may be too late


The impressive growth that the insurance-linked securities (ILS) market has witnessed, amplified by a host of new capital providers, could present challenges for potential investors that aren’t already active in the space.

As the ILS market matures there is an increasing realisation that institutional investors already allocating to ILS are likely to increase their contributions significantly, after any event that causes a reinsurance market dislocation or increase in pricing.

As a result, for those capital market investors seeking to wait out the softening of the reinsurance market and to come in at the first sign of a market turn, there is a risk of missing out as the sector may already have sufficient capital commitments.

An ILS roundtable, published by Dutch publication Financial Investigator recently, explored the growth and trends of the current ILS space and featured comments from leading sector participants, including John Wells of Leadenhall Capital Partners and Michael Stahel at LGT ILS Partners.

The growth and potential size of the ILS market was highlighted during the roundtable, which notes that excluding developing countries, of an estimated $300 billion total reinsurance market size as much as 40%, or $120 billion could be suitable for investors in the ILS space.

The fact the $120 billion figure excludes emerging countries shows that there is room for ongoing ILS market growth still, even after penetration reaches a plateau in developed catastrophe risk markets, a view shared by all the panelists and one that is widely acknowledged across the sector.

Interestingly though, panelist Wells from Leadenhall implied that if further growth is to come from new ILS market players, it would be wise for them to enter the market sooner rather than later to avoid missing out on the opportunities ILS offers.

Institutional investors, pension funds and other entities have increasingly sought to access the ILS market for yield, portfolio diversification and the benefits of investing in an uncorrelated asset class, and all the signs point for this to continue and intensify.

Wells stressed that those investors who are still sitting on the fence, perhaps waiting for spreads in the ILS and reinsurance market to improve post-event, might already have missed the opportunity as the money from all the ILS funds, pension funds and so on is already there, willing and able to upsize.

Stahel echoed this point, explaining that the “money in the sector now flows freely, indeed even after events.”

It’s an interesting point, and far removed from the more regularly seen discussions questioning the longevity of the host of new ILS market investors, with some assuming they would simply disappear after major losses and take whatever capital was left with them.

However, that notion increasingly seems to be an opinion of the past, as now many reinsurance and ILS industry experts express confidence that the ILS sector can withstand a large loss event, and the sizeable institutional investors will most likely remain post-event also, ready to increase their allocations as opportunities allow.

It is in some ways largely still an unknown though, as since the ILS, and catastrophe bond market included, has really started to acquire mass, the industry hasn’t had to deal with a significant, disruptive loss event.

While the growth of the ILS and catastrophe bond market is impressive, there is clearly still room for further expansion, particularly into regions of the world that are home to some of the poorest, and most vulnerable people to the impacts of natural disasters.

Instead of sitting on the fence and waiting for premiums to rise, panelists attending the roundtable implied that investors wishing to access the space would benefit from entering the market now, as too would the ILS market itself.

Smaller and larger investors seeking to enter ILS have an opportunity to innovate and create mutually beneficial solutions aimed at protecting the underserved, underinsured and highly vulnerable people in emerging, developing countries.

Getting involved in the market sooner rather than later can position investors much more strongly to benefit from any market turn. Investors making even a small allocation to ILS can begin to learn about the asset class more deeply, build relationships with fund managers, gain an appreciation of the opportunity and landscape and be poised to capitalise on any rise in pricing.

Those sitting on the sidelines, hoping to enter at the first sign of major losses could find themselves disappointed, if the ILS sector cannot absorb their capital because the existing investor base all choose to upsize their allocations first.

Investors on the sidelines are also likely missing out on conversations about new and innovative structures or products that ILS managers and markets are planning. Being engaged in the sector can provide inside knowledge and influence, allowing investors to become much more closely engaged in the market and giving much better visibility of the cycle and the initiatives going on behind the scenes.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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