ILS market interests converge to cultivate growth

Willis Towers Watson’s Global Insurance-Linked Securities (ILS) Market Survey Report offers a unique view of the ILS market across the ILS industry, comprising end investors, ILS fund managers and (re)insurance cedants.

Three converging viewpoints

To our knowledge, our analysis brings together views from these three groups of stakeholders for the first time in the industry. This is made possible by the cross-business expertise and client relationships of Willis Towers Watson’s Investment, Risk and Reinsurance business unit. The breadth of our organization provides singular access to all relevant ILS market participants (see diagram below).

Our research finds that each of the three groups of participating ILS constituents has weathered recent loss activity with their enthusiasm for ILS intact. Almost all reinsurers and cedants surveyed now see ILS as a positive factor in the market and anticipate further growth in the years ahead.

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Survey highlights

Key findings from the constituent parts of the ILS market include:

End investors

• ILS investors are not going away: Over half of investors cited strategic allocation to ILS between 2% and 5% of total assets — with 76% of investors satisfied with funds and investments to date (Figure 1).
• Portfolio diversification creates value: Portfolio diversification benefits drive investment decisions, not solely pure return. The outlook for other asset classes will not have a major impact on ILS allocations.
• Investors were ready for headline news catastrophe losses: The majority surveyed are happy with their ILS returns and are not reducing their allocation. This suggests they understand the risk profile of the asset class.
• Investors highlight peril diversification over cost reduction: 76% cite diversification across perils as being important, whereas ability to reduce costs was cited by only 40%.

Figure 1. Strategic asset allocation toward ILS

ILS funds

• Risk expansion: Funds expect ILS to incorporate new risks and believe investors have appetite for them (Figure 2).
• Capacity growth: Funds see ILS capacity growing in the next five years, with the vast majority of respondents anticipating growth greater than 10%.
• Use of fronters: The majority of ILS funds use fronter arrangements to supplement investments with other arrangements (70%). These complement direct collateral (e.g., cat bonds, trust fund structures).
• Third-party valuation review: Only a third of ILS funds appoint independent third-party valuation agents for illiquid (Level 3) assets. After the events of 2017, it will be interesting to see if the governance demands from internal and external stakeholders increases.

Figure 2. Areas of non-life risk seen as most attractive for future growth

Cedants

• Increased capacity through ILS: Approximately one in four cedants reports that capacity derived from ILS is greater than 30% (Figure 3).
• Claim recoveries: Close to half of cedants have recovered claims from ILS capacity providers. Almost all who recovered claims have had positive experiences.
• Scope for non-property catastrophe risk use: Over half of respondents consider using ILS capacity for nonproperty cat risks, either as part of a multiline cover or on a stand-alone basis (13% have already done so).

Figure 3. Capacity limit originated from ILS

Survey participation

Our web-based survey of 117 global ILS participants was fielded in June 2018. For more details about the survey participants, please download the report.