With recent tests and ongoing challenges over the past three years, the insurance-linked securities (ILS) market remains resilient, according to a new Willis Towers Watson (WTW) report on the ILS market.
The report showed that most end investors are satisfied with their ILS performance, with 86 percent of ILS funds expecting market growth of 5 percent or more cumulatively during the next five years.
It also highlighted that more than half of reinsurance and insurance companies surveyed worldwide now use ILS capacity.
The survey was conducted between June and August 2020 and included 122 global ILS market participants to provide a snapshot of the views of the ILS industry.
Participants came from four segments including end investors, ILS funds, insurance and reinsurance companies, and corporate risk managers.
The survey showed that across the board, ILS funds and end investors expect further growth driven by factors such as the impact of climate change and the positive ESG characteristics of ILS.
End-investor respondents identified non-catastrophe weather insurance (64 percent) and life, accident and health risks (46 percent) as suitable for ILS mandates, but less than a quarter found appeal in ILS for other perils, with only 5 percent interested in securitised cyber risk.
Other results showed that over 80 percent of end investors expect to either increase their ILS allocation in the next 12 months or expect it to be unchanged.
Meanwhile, about a third of end investors indicated that they had postponed new ILS allocations as a result of COVID-19.
At the end of 2019, before any potential impacts of COVID-19, two-thirds of ILS funds reported trapped collateral of 5 percent or less of their assets under management, according to the survey.
It also revealed that four in five fund manager respondents expect climate change to create significant threats and opportunities for the ILS market during the next five years.
The use of ILS remains stable over the last two years with, similar to 2018, over half (56 percent) of insurers and reinsurers accessing ILS capacity.
However, only 17 percent, down from 27 percent in 2018, still derive more than 20 percent of their capacity limit from ILS.
Elsewhere, the survey showed that 70 percent of the North American insurers and reinsurers 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.
Commenting on the report, William Dubinsky, managing director 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.”
Nadia Schmidt, alternative capital practice group leader, Willis Re International noted: “The survey also reveals some disconnects. 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 behaviour 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,” she added.
The survey constituted 58 providers of ILS capacity and 64 capacity users including insurance and reinsurance companies and corporate risk managers. It aims to capture global and regional trends with 44 percent of capacity users respondents coming from North America and 56 percent coming from the rest of the world.
