Insurance Linked Securities Move from ‘Alternative’ to Mainstream: WTW Survey

By | October 24, 2018

The insurance-linked securities (ILS) market is here to stay, said a new survey from Willis Towers Watson.

End investors, ILS funds, and buyers – the three groups active in ILS – have predominantly weathered 2017 loss activity and accept that reinsurance products backed by “alternative” capital have become mainstream, according to the survey’s findings published in Willis Towers Watson’s Global ILS Market Survey.

The survey found that 58 percent of responding cedents use some ILS capacity, with one in four deriving more than 30 percent of capacity from ILS.

Further, the report added, cedents and ILS funds believe that ILS will continue to grow including entry into areas outside of property catastrophe.

“A broadening of product offering in the ILS sector has already occurred, and this is set to continue with other classes of business coming on stream, such as property per risk, cyber and marine,” it continued, pointing to recent transactions in the areas of wildfire liability and motor third-party liability.

More than half of survey respondents said they would consider using ILS capacity for non-property cat risks, either as part of a multi-line cover or on a stand-alone basis, while 13 percent of cedents said they have already done so.

The most common forms of capacity used are fronted capacity on a traditional program (71 percent), collateralized capacity on a traditional program (53 percent) and collateralized backed by catastrophe bonds (37 percent), noted the report.

The survey found that close to half of cedents have recovered claims from ILS capacity providers and almost all of those who recovered claims have had positive experiences.

For those cedents that are not using ILS, the main reasons given are loyalty to reinsurers, frictional setup costs and pricing, which could indicate areas that ILS sponsors need to address, WTW said.

Going forward, 19 percent of these nonparticipants are expecting to use ILS capacity within the next three years, with more saying they will seek more information before making a decision, the report continued.

Established Asset Class

Further, the report said, end investors confirm they see reinsurance as an established asset class, which counters a common perception that rising yields in other asset classes would divert capital from ILS.

End investors perceive diversification (96 percent) and non-correlation with financial asset classes as key drivers, while only 12 percent said they are mainly focused on the return/yield potential of ILS, ranking fourth among responses behind diversification, noncorrelation and cost.

Despite high estimated insured losses of $91 billion from U.S. natural catastrophes in 2017 (according to the Insurance Information Institute), investors remained happy with the performance of the class, the report indicated. “Some 80 percent agreed that 2017 ILS funds’ performance was in line with expectations, given the scale of the natural disasters.”

More than half of investors surveyed cited strategic allocation to ILS of between 2 percent and 5 percent of their total assets, said the report, adding that two-thirds expect to maintain or increase their allocation.

“For growth to continue, ILS investors will need to demonstrate the ability to innovate and provide optimal solutions to meet clients’ evolving needs,” commented James Kent, global chief executive officer, Willis Re.

“The ILS investors with longstanding and successful track records, supported by consistent and well-regarded management teams, are the ones best equipped for future success,” he said in a statement.

Willis Towers Watson’s web-based survey of 117 global ILS participants – consisting of end investors, ILS funds and cedents – was conducted more than six months after the major 2017 losses, said WTW, noting that responses are therefore informed by the crystallization of ILS funds’ performance.

Source: Willis Towers Watson

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