ILS "Alternative Capital" Has Become Mainstream

Businessman looking at a hologram of a globe in his hand and the word MAINSTREAM extending from his face to the equator line

October 23, 2018 |

Businessman looking at a hologram of a globe in his hand and the word MAINSTREAM extending from his face to the equator line

Those active in insurance-linked securities (ILS)—end investors, ILS funds, and buyers—have predominantly weathered 2017 loss activity with a view that reinsurance products backed by "alternative" capital have become mainstream, according to the latest Willis Towers Watson (WTW) Global ILS Market Survey.

WTW said investors and cedents alike continue to show appetite for such transactions. Accordingly, cedents and funds share the view that ILS will continue to grow, partly through increased usage and partly by covering risks outside of property catastrophe, such as property per risk, cyber, and marine.

Furthermore, according to the survey, end investors confirm that they see reinsurance as an established asset class. WTW feels that the survey is therefore counter to some observations that rising asset yields would deter new capital inflows to ILS. The survey presented the following findings.

  • 58 percent of responding cedents use some ILS capacity, with one in four deriving more than 30 percent of their capacity from ILS.
  • Over half of nonusers would consider adopting ILS capacity over the next 3 years.
  • Close to half of ILS buyers surveyed have recovered claims under their contracts. Almost all reported the collections as a positive experience.
  • Over half would consider using ILS for non-property-catastrophe risks, either as part of a multiline cover or on a standalone basis. 13 percent have already done so.
  • 2017 catastrophe losses have not deterred end investors. 80 percent agreed that 2017 ILS funds' performance was in line with expectations.
  • End investors perceive diversification (96 percent) and noncorrelation with financial asset classes as key drivers. Relative yield ranked only fourth.
  • More than half of end investors have strategic allocations between 2 percent and 5 percent of total assets; two-thirds expect to maintain or increase their allocation.
  • Post 2017 losses, almost half of end investors (48 percent) tactically increased their ILS allocation. Another 16 percent allocated capital to rebalance ILS to its long-term strategic weight.
  • Only 20 percent of end investors made reductions; post-loss redemptions were few.
  • ILS funds anticipate further growth over the next 5 years, with the vast majority expecting this to grow more than 10 percent.
  • Only a third of ILS funds appoint independent third-party valuation agents for illiquid (level 3) assets.

James Kent, global CEO of Willis Re, said, "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. From a Willis Re perspective, we see a divergence in the intent of (re)insurers to utilize 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."

October 23, 2018