Resilient ILS market still attractive to investors, says Willis Towers Watson report

The insurance-linked securities (ILS) market remains resilient and most end investors are satisfied with their ILS performance after big tests during the past three years, according to Willis Towers Watson. In its Global Insurance-Linked Securities Market Survey Report, the broker says that a large majority of institutions have been investing in ILS for at least five years, and based on that experience, only 5% are slightly dissatisfied with investment performance to date. William Dubinsky, managing director, Willis Re Securities, said: “The survey suggests that the ILS market may have adapted more swiftly and effectively than generally reported to the challenges posed by Hurricane Irma and subsequent events over recent years, but the story is not over. Notwithstanding guarded optimism, Covid-19 and continued uncertainty around other property-related losses have created additional challenges for end investors, ILS funds, and cedants alike.” The report notes that 86% of ILS funds expect market growth of 5% or more cumulatively during the next five years, and more than half of reinsurance and insurance companies surveyed worldwide now use ILS capacity. Willis Towers Watson surveyed end investors, ILS funds, insurance and reinsurance companies, and corporate risk managers. ILS funds and end investors expect further growth, driven by factors such as the impact of climate change and the positive ESG characteristics of ILS, according to the report. End-investor respondents identified non-catastrophe weather insurance (64%) and life, accident and health risks (46%) as suitable for ILS mandates. However, only 23% identified casualty, 18% financial guaranty, credit insurance and mortgage insurance, 9% terror and just 5% are interested in securitised cyber risk. Nadia Schmidt, alternative capital practice group leader, Willis Re International, said: “The survey also reveals some disconnects. Insurers and reinsurers would like to use ILS capacity to protect risks beyond natural catastrophes, like cyber and casualty risks, but end investors have little appetite. Investors and funds see steady growth ahead, but some buyers have been more restrained in their behaviour towards ILS. However, these seem to be relatively minor concerns. Overall, our survey reveals that ILS capacity providers and ILS capacity users alike remain committed to the market and feel positively about the health and future of ILS.” ILS funds see the most attractive non-life risks for future growth as property risk, aviation and satellite, and terror. More than 70% of ILS funds report that end investors are supportive of investment outside property catastrophe risk, while 80% of ILS funds expect climate change to create significant threats and opportunities for the ILS market during the next five years, the report finds. It notes that at the end of 2019, before any potential impacts of Covid-19, two thirds of ILS funds reported trapped collateral of 5% or less of their assets under management. The report states that a third of end investors indicated that they had postponed new ILS allocations as a result of Covid-19. However, more than 80% of end investors expect to either increase their ILS allocation in the next 12 months or expect it to be unchanged. As for the re/insurance industry, the use of ILS has remained stable during the last two years, with more than half (56%) of insurers and reinsurers accessing ILS capacity, similar to 2018. However, only 17% still derive more than 20% of their capacity limit from ILS, down from 27% in 2018. The report says that 70% of the North American insurers and reinsurers who access ILS capacity derive between 11% and 30% of capacity from ILS, while 70% of their international counterparts say ILS is the source for less than 10% of capacity. Corporate risk managers in the survey said diversification of capacity is the most attractive aspect of ILS. “While just over a third expect to use ILS in the next three years, most other risk managers remain open to accessing it (mainly for multiline covers) if they have more information. The main sorts of information they are looking for are the relative sustainability of (re)insurance capacity versus ILS capacity (73%) and relative claim payment history (64%),” the report states. Matthew Ball, ILS consulting leader, insurance consulting and technology, said the survey suggests that the ILS market is continuing to improve in the areas of governance and transparency. “In particular, the number of ILS funds appointing independent third-party valuation agents for illiquid (Level 3) assets has increased from a third in 2018 to just over a half in 2020. This is probably not surprising, in light of the catastrophe events of recent years. The end investors agree – they cite the level of reporting and transparency as the most important characteristic of a good ILS fund – above low fees,” he said.

Resilient ILS market still attractive to investors, says Willis Towers Watson report

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