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More risk required to enable greater allocations to ILS, finds report


The continued growth of the insurance-linked securities (ILS) and alternative reinsurance capital market underlines the sophistication and willingness of its investor base, but new risk premium is required for the sector to expand further, finds a new report.

Insurance linked securities for institutional investors 2017Despite persistent growth which has slowed somewhat in recent times, the current size of the ILS space could be hindering larger allocations from institutional investors, according to ILS market participants and experts in the sixth annual ILS for Institutional Investors report from Clear Path Analysis.

Investment Director for Credit & Insurance-Linked Investments at PGGM, Eveline Takken-Somers, explained; “Our asset allocation studies indicated that we could allocate more towards ILS. The size of the current ILS market prevents a higher allocation. The access to the traditional reinsurance market might be the key in unlocking more capacity in the overall market.”

Pension funds, managers or plans such as PGGM are among the most common investors in the ILS space, typically allocating around 1% -3% of their investments to the space, benefitting from stable, albeit currently reduced returns that offer low correlation to broader financial markets, and valuable investment diversification.

Earlier this year Artemis discussed the launch of the $200 million Leo Re Ltd. collateralised reinsurance sidecar that was funded by Dutch pension fund manager, PGGM, and also reported that at this time PGGM’s allocation to the ILS space stood at $4 billion.

Considering the alternative reinsurance capital market is estimated to account for roughly $81 billion of the overall reinsurance market size, PGGM’s allocation as at January 2017 is a sizeable contribution.

Chris Parry, Managing Director of RenaissanceRe Ventures, commented on the size of the ILS market; “In terms of flows, we’ve actually just observed a record first quarter for cat bond issuance. In April, around $4 billion of cat bonds were being marketed with the expectation that 2017 could be a record year for issuance. What is really nice this year is that we are seeing both a mixture of new and existing investors, as well as new perils being considered”

As shown by the Artemis Deal Directory and Q1 2017 ILS and cat bond market report, issuance in the first three months of 2017 again broke records, and the pipeline for Q2 suggests a continuation of this trend.

However, and as noted by Takken-Somers, it appears that some investors are eager to allocate more assets to the space but are unable to do so owing to a lack of new risk premium entering the market.

ILS investors have grown in maturity and sophistication alongside the marketplace and appear willing to take on more and more risk in both existing and emerging peril regions, but it’s hard for entities such as PGGM to grow into a market that’s restricted in size.

Thus, the report finds that as well as the impacts of technological innovation on the ILS sector, new risk premium entering the market could enable greater allocations to the space from willing and able investors, both existing and new.

“The primary driver of that interest (in ILS) continues to be a desire for more non-correlated assets, but increasingly the Responsible Investing piece is a bigger part of this conversation,” said Barney Schauble, Managing Partner at Nephila Advisors.

This notion further supports the continued growth in maturity and sophistication of the ILS investor base and, as the marketplace becomes more responsible it’s likely more and more investors will look to the space, again supporting the need for new risk premium to enter the market as competition continues to intensify, ultimately pressuring rates.

So far in 2017 the catastrophe bond market, which is the second largest sub-sector of the ILS space after the collateralised reinsurance market, has experienced strong and record-breaking growth, with issuance already beating that seen in full-year 2016.

ILS capital, whether via sidecars, catastrophe bonds or collateralised reinsurance structures is increasingly looking to access new business lines in emerging and advanced markets, but innovation is needed to ensure market expansion.

Events like the recent WannaCry ransomware cyber-attack highlight the need for deep pools of capital to address the evolving risk landscape, with ILS being a willing and able market that can provide both the capital and skills required to develop innovative solutions for all kinds of risks, ultimately stimulating more risk premium which in turn is expected to lead to greater allocations from capital markets investors.

Benjamin Jacquet, ILS Underwriter & Cyber Risk Expert at Credit Suisse ILS Strategies, commented on the recent cyber event and how this could be driving interest from ILS market participants.

“It varies a lot from cyber insurer to cyber insurer, as well as by type of product within a cyber portfolio. But 40% – 60% of loss ratio is something that we see and is something which is pretty healthy,” said Jacquet.

A copy of the sixth annual ILS for Institutional Investors report from Clear Path Analysis can be downloaded from its website.

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