After big tests during the past three years, the Insurance-Linked Securities (ILS) market remains resilient. Most end investors are satisfied with their ILS performance, 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 world-wide now use ILS capacity, according to the new Global Insurance-Linked Securities Market Survey Report from Willis Towers Watson, a leading global advisory, broking and solutions company (NASDAQ: WLTW).
Willis Towers Watson surveyed 122 global ILS market participants between June and August 2020 to provide a snapshot of the views of the ILS industry. Participants came from the following four segments: end investors, ILS funds, insurance and reinsurance companies, and corporate risk managers. Almost across the board, 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. End-investor respondents identified non-catastrophe weather insurance (64%) and life, accident & health risks (46%) as suitable for ILS mandates, but less than a quarter found appeal in ILS for other perils, with only 5% interested in securitised cyber risk. The survey found that:
· Over 80% of end investors expect to either increase their ILS allocation in the next 12 months or expect it to be unchanged.
· About a third of end investors indicated that they had postponed new ILS allocations as a result of COVID-19.
· 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.
· Four in five fund manager respondents expect climate change to create significant threats and opportunities for the ILS market during the next five years.
· The use of ILS remains stable over the last two years with, similar to 2018, over half (56%) of insurers and reinsurers accessing ILS capacity. However, only 17%, down from 27% in 2018, still derive more than 20% of their capacity limit from ILS.
· 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.
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.
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.
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.
Carl Hess, Head of Investment, Risk and Reinsurance at Willis Towers Watson, said: “We collaborated across Willis Towers Watson with input from Corporate Risk & Broking, Investments, Insurance Consulting & Technology, Willis Re and Willis Re Securities. This approach gave us access to all of the relevant market participants. As a result, our comprehensive ILS market view reflects the differing perspectives existing within the market. It’s the same connected, integrated approach we use to deliver ILS advice and solutions for our clients.”
View the full report here.