Broad appeal for ILS despite ongoing challenges

The insurance-linked securities (ILS) market remains resilient despite challenges over the last three years, according to a new report from Willis Towers Watson.

According to Willis Towers Watson’s new Global Insurance-Linked Securities Market Survey Report, most end investors are satisfied with their ILS performance, 86% of ILS funds project market growth of 5% or more cumulatively over the next five years, and more than half of reinsurance and insurance companies surveyed worldwide use ILS capacity.

Willis Towers Watson surveyed 122 ILS market participants for the report. Survey participants came from four segments: end investors, ILS funds, insurance and reinsurance companies, and corporate risk managers. The survey found that ILS funds and end investors expected further growth, driven by factors including the impact of climate change and the positive ESG characteristics if ILS.

End-investor respondents identified non-catastrophe weather insurance (64%) and life, accident and health risks (46%) as suitable for ILS mandates. However, less than a quarter found appeal in ILS for other perils, and only 5% were interested in securitized cyber risk, Willis Towers Watson said.

Other findings include:

• More than 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 said they had postponed new ILS allocations due to COVID-19
• At the end of 2019 – prior to impacts from the COVID-19 pandemic – two-thirds of ILS funds reported trapped collateral of 5% or less of their assets under management
• Four out of five fund manager respondents expect climate change to pose significant threats and opportunities for the ILS market over the next five years
• The use of ILS has been stable over the last two years, with 56% of insurers and reinsurers accessing ILS capacity. However, only 17% – down from 27% in 2018 – derive more than 20% of their capacity limit from ILS
• 70% of North American insurers and reinsurers who access ILS capacity derive between 11% and 30% of capacity from ILS. Meanwhile, 70% of international insurers and reinsurers who access ILS capacity say ILS is the source for less than 10% of capacity

“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,” said William Dubinsky, managing director of Willis Re Securities. “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.”

“The survey also reveals some disconnects,” said Nadia Schmidt, alternative capital practice group leader at Willis Re International. “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 behavior 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.”