Steady as she goes
A Willis Towers Watson report into the ILS industry in 2020 revealed interesting differences of opinion between investors and ILS managers in terms of what risks should be packaged as ILS. Bermuda:Re+ILS reports.
“The ILS market may have adapted more swiftly and effectively than generally reported to the challenges posed by Hurricane Irma and subsequent events.” William Dubinsky, Willis Re Securities
A Willis Towers Watson (WTW) Global Insurance-Linked Securities (ILS) Market Survey Report, “After Big Tests, ILS Market Shows Resilience”, has revealed a positive mood around the ILS market. Investors, ILS managers, re/insurance companies and corporate risk managers all expressed some positive sentiments about the asset class in 2020 in the report, which was based on a survey of ILS market practitioners.
WTW noted that, although the ILS market has not been growing as some had expected two years ago, activity has rebounded strongly this year, especially in the non-life cat bond sub-segment.
“Investors see increasing value in cat bonds relative to other forms of ILS investment,” WTW noted. “The reach of ILS is also extending beyond property catastrophe into such areas as weather insurance and terror and even into areas not explicitly covered in our survey or these figures, such as mortgage insurance ILS.”
Only 5 percent of ILS end investors are attracted to the idea of investing in securitised cyber risk, according to the survey. This revealed a disconnect between investors and re/insurance companies and corporate risk managers, WTW noted, which would welcome cyber ILS capacity. “This is possibly because end investors are less familiar with cyber risk as an insurance peril,” WTW suggested.
Instead, end-investor respondents to the WTW report identified non-catastrophe weather insurance (64 percent) and life, accident & health risks (46 percent) as suitable for ILS mandates (Figure 1). Less than a quarter of ILS end investors found appeal in ILS for other perils.
Risk areas that end investors consider suitable for ILS investment mandates
The report, which surveyed ILS market participants globally, found that over 80 percent of end investors expect either to increase their overall ILS allocations in the next 12 months—or that they will be unchanged (Figure 2). This shows that market disruptions from catastrophe losses in 2018 and 2019, and from COVID-19, have not significantly dented enthusiasm for ILS investments, the report concluded.
ILS investment intentions over the next 12 months
Just over three-quarters of end investors allocate between 1 percent and 5 percent of their assets to ILS, with a further 9 percent exceeding 5 percent, according to the survey. And with a large proportion of institutions investing in ILS for at least five years, only 5 percent are slightly dissatisfied with investment performance to date.
End investors told WTW that transparency was the most important characteristic of a good ILS manager. The survey revealed that investors appreciate managers that have the flexibility to invest across a full range of ILS opportunities, and also like managers that have low management fees.
ILS funds bullish on growth
The WTW report revealed a high level of bullishness about the growth prospects for ILS among ILS funds, with 86 percent of them expecting market growth of 5 percent or more cumulatively during the next five years. That is despite around a third of end investors indicating they had postponed new ILS allocations as a result of COVID-19.
ILS funds were less bullish in their expectations of market growth over a five-year period than they had been in 2018, however. In 2018, 92 percent of ILS funds predicted market growth would exceed 10 percent, but that figure has now fallen to 60 percent (Figure 3).
ILS market growth predictions in the next five years, 2018 versus 2020
Managers took a different view from investors about the most attractive non-life risks for future ILS growth, with property risk, aviation and satellite, and terror seen as the most attractive non-life risks for ILS funds’ future growth. Over 70 percent of ILS funds reported that end investors are supportive of investment outside property catastrophe risk.
Four out of five fund manager respondents expect climate change to create significant threats and opportunities for the ILS market during the next five years, the report said.
Meanwhile, ILS funds have moved more investment to retrocessional reinsurance in 2020, according to WTW. On average, 37 percent of an ILS portfolio is now allocated to retro, compared with 25 percent in 2018, the report said.
The report also suggested that concerns around trapped capital have been easing in recent years. Two-thirds of ILS funds reported having trapped collateral of 5 percent or less of their assets under management at the end of 2019, before the impact of COVID-19 had been felt, according to the report.
The proportion of ILS funds reporting trapped collateral of 0 to 5 percent of assets under management for the end of 2019 was 66 percent, compared with 50 percent for the end of 2017 and 46 percent for the end of 2018. Meanwhile there was also a reduction in the number of ILS funds reporting very high trapped capital, with only 14 percent of respondents reporting trapped collateral of more than 10 percent of assets under management at the end of 2019, compared with 25 percent at the end of 2017 and 26 percent at the end of 2018.
Use of ILS capacity dips
Only 17 percent of re/insurance companies derive more than 20 percent of their capacity limit from ILS in 2020, according to the WTW report, down from 27 percent in 2018. Overall the use of ILS has remained relatively stable, though the number of re/insurance companies using ILS capacity inched down to 56 percent in 2020, from 58 percent in 2018.
In North America, 70 percent of the re/insurers who access ILS capacity derive between 11 percent and 30 percent of capacity from ILS, while 70 percent of their international counterparts say ILS is the source for less than 10 percent of capacity.
The use of collateralised capacity on traditional programmes has increased to 69 percent of respondents in 2020, from 53 percent in 2018, WTW said, while the use of capacity backed by cat bonds has also increased by 8 percent.
Re/insurance companies and corporate risk managers shared the view that the primary attraction of ILS is diversity of capacity. Just over a third of corporate risk managers expect to use ILS in the next three years, according to WTW, while most other risk managers remain open to accessing it, mainly for multiline covers, if they have more information, particularly relating to the relative sustainability of re/insurance capacity versus ILS capacity (73 percent) and relative claim payment history (64 percent).
“ILS is still in a nascent phase in corporate risk management,” noted the report. “Larger companies, especially those with a captive insurer (75 percent of organisations in our moderate sample) are the most likely to be taking a closer interest, based primarily on the potential for diversification of insurance capacity.”
The WTW report was based on a survey of 122 global ILS end investors, ILS funds, re/insurance companies and corporate risk managers, between June and August 2020. William Dubinsky, managing director at 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.”
Matthew Ball, ILS consulting leader for insurance consulting and technology, highlighted evidence of improvements in the areas of governance and transparency.
“The number of ILS funds appointing independent third-party valuation agents for illiquid (level three) assets has increased from a third in 2018 to just over a half in 2020,” he noted. “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.”