The ongoing expansion of the insurance-linked securities (ILS) asset class is increasingly supported by government and NGO activity, while investors take advantage of a compelling ESG proposition, according to Andries Hoekema, HSBC Global Asset Management and Helen Goonewardene, HSBC Issuer Services.
Surpassing $90 billion in 2018, the ILS market has continued, albeit at a slower pace, to expand in spite of the costly impacts of recent catastrophe events.
Investor appetite for catastrophe risk remains and while the sophisticated investor base was reminded that losses are an eventuality in the risk transfer space, the market continues to reach new heights.
The embrace of the asset class by investors has been highlighted by Hoekema, Global Head, Insurance Sector at HSBC Global Asset Management, in a recent report on the rise of ILS. He notes year-on-year growth in the space that’s supported by low interest rates, increasing popularity among insurers as a result of Solvency II, and also the sector’s unique ESG (environmental, social, governance) selling point.
“Interestingly, we are also seeing a growing number of insurance companies themselves invest into these bonds, which is unexpected as they are normally the ones writing the insurance,” says Hoekema. In part, he explains, this is due to Solvency II rules which enables firms to add diversifying insurance exposure via ILS at low marginal regulatory capital charges.
Highlighted by the multi-country cat bond offering from issuer the World Bank’s International Bank for Reconstruction and Development (IBRD), which covered Chile, Colombia, Peru, and Mexico against earthquake losses, governments and NGOs are increasingly looking to leverage ILS capital.
More recently, a catastrophe bond for the Philippines came to market, issued by the World Bank on behalf of the country through the IBRD and which provides $225 million of earthquake and tropical cyclone protection.
Clearly, the template is there for these types of solutions to be expanded to more countries and so long as the modelling is sufficient and the risk is well understood and adequately priced, investors appear willing to push the boundaries of ILS.
“A lot of the countries which are disproportionally impacted by catastrophe risk are developing markets where there has historically not been a strong tradition of insuring risk. By sponsoring these issues, it enables local NGOs and governments to obtain the necessary funding to provide aid when catastrophes happen,” said Hoekema.
Ultimately, leveraging re/insurance protection through an ILS transaction removes some of the risk and cost from the governments balance sheet post-event, freeing while at the same time providing funds for recovery and rebuilding.
Furthermore, many of these structures utilise a parametric trigger, designed to rapidly disburse funds once disaster strikes to ensure rebuilding and recovery starts as soon as possible, which mitigates the impact on societies and economies in the aftermath of a natural disaster.
With sustainability and resilience increasingly at the forefront of the minds of institutions such as pension funds and sovereign wealth funds, which are prominent investors in ILS, Hoekema and Goonewardene, Vice President, Relationship Manager for HSBC located in Bermuda, say that ILS has a unique ESG selling point.
Goonewardene explains that for investors, catastrophe bonds are seen as a compelling ESG proposition, as it helps them “cement” their ESG credentials with both end clients and regulators.
Through the supply of capacity that aids the response to disasters and climate-related catastrophes, as well as the recovery, ILS are becoming an important source of risk transfer and funding.
Ethical investment qualities are something that investors are looking for more and more, and combined with the ESG qualities evident in ILS, might suggest this is another potential growth driver for the market.