End investors, ILS funds, and buyers – the three groups active in ILS – have predominantly weathered 2017 loss activity with a view that reinsurance products backed by ‘alternative’ capital have become mainstream, according a study by Willis Re.
The Global ILS Market Survey polled the three constituents of the insurance-linked securities market more than six months after the major losses of 2017, thus having ample time for the events to reflect in their responses.
Both cedants and funds shared the view that ILS will continue to grow, partly through increased usage, and partly by covering risks outside property catastrophe, such as property per-risk, cyber, and marine. Meanwhile, investors and cedants alike continued to show appetite for such transactions.
The majority (58%) of cedants use some ILS capacity, with one in four deriving over 30% of their capacity from ILS. Over half of non-users said that they would consider adopting ILS capacity over the next three years.
Close to half of ILS buyers surveyed have recovered claims under their contracts, with almost all reporting the collections as a positive experience. Over half would consider using ILS for non-property cat risks, either as part of a multiline cover or on a standalone basis, with 13% having already done so.
End investors confirmed their view of reinsurance as an established asset class, despite the 2017 catastrophe losses. Eight in 10 (80%) agreed that 2017 ILS funds’ performance was in line with expectations. These end investors perceived diversification (96%) and non-correlation with financial asset classes as key drivers, while relative yield ranked only fourth.
The survey’s findings contradicted some observations that rising asset yields would deter new capital inflows to ILS.
Furthermore, ILS funds anticipate further growth over the next five years, with the vast majority expecting this to grow more than 10%. Only a third of ILS funds appointed independent third-party valuation agents for illiquid (Level 3) assets.
“The industry has widely reported the growth in the ILS market and this comprehensive survey further supports the development of ILS as an asset class despite the challenges of the catastrophe events in 2017,” said James Kent, global CEO of Willis Re. “From a Willis Re perspective, we see a divergence in the intent of re/insurers to utilise ILS capacity largely driven by client type. For growth to continue, ILS investors will need to demonstrate the ability to innovate and provide optimal solutions to meet clients’ evolving needs. Furthermore the trust language, where used, will need to reflect a closer alignment with clients’ expectations. 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.”