ILS funds & investors forecast market growth after COVID stall: WTW survey

The market for investments in insurance-linked securities (ILS) is expected to return to growth by many of its core constituents after a stall in activity caused by the COVID-19 pandemic, a survey of the market by Willis Towers Watson has found.

COVID-19 caused end-investors in ILS to postpone allocations to the market, but did not result in significant redemptions or top-ups, with the majority of ILS investors adopting a wait and see approach to injecting new capital into ILS investment fund strategies.

This is according to the latest ILS market survey from Willis Towers Watson, where the brokerages reinsurance and capital markets unit have polled some 120 market participants for their views.

The survey found that the broad appeal of investing in ILS remains and the ILS market’s position as a core provider of risk capital for insurance, reinsurance and retrocessional means is also strongly embedded in the broader industry.

This is despite recent tests to the ILS market from major catastrophe losses, the loss creep some of those events has caused, the trapped collateral issues witnessed and the effects of the COVID-19 pandemic.

The ILS market remains resilient, according to Willis Towers Watson, despite the effects of these multiple challenges.

In fact, the ILS market may be primed for growth, just as soon as the uncertainty related to the global pandemic wears off and investors are able to refocus on allocations to niche asset classes such as reinsurance again.

The results of the survey shows that the majority of end-investors are satisfied with their allocations to ILS and reinsurance-linked investments, with just 5% saying they are slightly dissatisfied with the experience.

In fact, some 41% of end-investors that responded to the survey said that they will be looking to increase their allocations to the ILS market during the next 12 months, with 9% saying that increase may be more than a 10% increase in allocation.

In total, over 80% expect their allocation to ILS will either grow or remain unchanged over the next year, suggesting a strong chance for further outright ILS market expansion.

The global COVID-19 pandemic is cited as causing a stall in the ILS market, as around a third of investors polled said that the pandemic has caused them to hold back on investment allocations they had planned for the first-half of 2020.

On the ILS fund manager side, the outlook is equally bullish, with 86% of ILS funds expecting growth of 5% or more cumulatively over the next five years.

The outlook from the fund manager side is slightly less bullish than in 2018, when Willis Towers Watson also surveyed the market, with now only 60% of ILS funds expecting 10% or greater ILS market growth.

But, given the years of catastrophe losses experienced and the pandemic, the forecasts for growth are positive for the ILS market as a whole, as they suggest a good deal of alignment between managers and investors, in particular about where the market has opportunities going forwards.

The level of insurance and reinsurance companies using ILS within their risk transfer has not changed significantly, with 56% saying it is a part of their programs.

But, it’s perhaps less deeply embedded for some at this point in time as 17% said they derive over 20% of their capacity limit from ILS, down from 27% in 2018.

The United States market remains the focus for the ILS community, with some 70% of North American insurers and reinsurers who access ILS capacity saying they derive between 11% and 30% of capacity from ILS, while 70% of their international counterparts say ILS makes up less than 10% of their capacity limit.

This shows the growth opportunity around the world for ILS capital to become more deeply embedded into international insurance and reinsurance programs over time.

Overall, the survey suggests a good deal of stability in the ILS market, despite the challenges faced, as well as the opportunities for growth and expansion in the remit of ILS.

80% of ILS fund manager respondents say that climate change is expected to present both significant threats and also opportunities for the ILS sector as a whole.

But “almost across the board” Willis Towers Watson says that both ILS funds and their investors expect further market growth to be driven by factors such as the impact of climate change and the positive ESG characteristics of ILS, suggesting that for innovative managers who embrace this there could be a chance for significant gains to be made.

Positively, the survey portrays a strong commitment to the market among end-investors in ILS, while ILS fund managers appear entirely realistic about the challenges faced and the evident opportunities.

William Dubinsky, Managing Director Willis Re Securities, commented on the survey results, “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.”

Nadia Schmidt, Alternative Capital Practice Group Leader, Willis Re International, added, “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.”

Matthew Ball, ILS Consulting Leader, Insurance Consulting & 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.”