Just 1% of European pensions allocate to ILS: Mercer survey


While it sometimes feels as if insurance-linked securities (ILS) and reinsurance linked investments are almost mainstream, there is still a way to go before the asset class truly becomes a staple of the major institutional investors of this world, as evidenced in the results of a recent survey by Mercer.

Mercer’s 2018 European Asset Allocation Report surveyed 912 participating institutional pension fund investors across 12 countries, reflecting total assets under management of around €1.1 trillion.

With the report providing a comprehensive review of the European pension fund sector and its allocation strategies, which is of course the main target investor type for much of the ILS sector, you might have thought ILS would be more broadly invested in, but uptake among institutions still has a long way to go.

Overall, Mercer found that European institutional investors continue to look for diversifying  alternative asset classes to invest in, outside of more traditional equity exposures.

In fact, the shift away from equities and volatile classes continues, as pensions and institutional investors look for asset classes that can complement their portfolios, adding diversifying returns which have a lower correlation to financial markets, so this includes a greater use of alternatives.

“The search for diversification seems more relevant than ever and has encouraged investors to seek alternatives to traditional equity and bond assets,” Mercer explained.

In fact, in the UK the fall in equity allocations among UK pension plans is almost matched by increased allocations to alternatives, which you’d think would lead to more ILS investing and it is, but the uptake remains slow and it seems there is a long way to go for ILS to be considered truly a mainstream investment option.

ILS funds fall within the hedge fund bracket for Mercer’s survey purposes and the data shows that across all the pension investors surveyed, just over 1% already have an allocation to ILS, a very small number out of the 912 quizzed.

The average allocation size to the ILS asset class across those 1% of institutional investors surveyed is 3%, which is aligned with other surveys of investor allocations to the insurance and reinsurance linked space.

Average ILS investor allocations

Strategic Allocation to Hedge Funds (%) - Chart from Mercer

Artemis spoke with Mercer and the company supplied a little more information on the pensions behind the numbers.

The 1% of pensions that do have allocations to ILS are 12 in number and all defined benefit, 10 of which are from the UK, 1 from Italy and 1 from the Netherlands.

All of the pension plans that allocate to ILS have total assets of more than EUR 250 million and 7 of them have more than EUR 2.5 billion of assets, reflecting the fact that it is the larger, more sophisticated pension schemes that tend to have allocations to ILS and reinsurance.

Mercer said that there were 4 more Swiss pension schemes with a hybrid structure that allocate to ILS, but these were not captured in the chart above as they were not defined benefit in nature. These four schemes all have total assets of over EUR 100 million.

Finer details aside, the main story here is that just 16 the of the 912 pension plans surveyed by Mercer are already allocating to ILS strategies.

For the ILS fund managers of this world this demonstrates the size of the opportunity, as the many pension funds not yet invested in ILS are all set to become potential customers of the ILS market as it expands.

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