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Survey Report

After Big Tests, ILS Market Shows Resilience

2020 Global Insurance-Linked Securities Market Survey Report

Insurance Consulting and Technology|Insurance Linked Securities|Investments|Securities|Reinsurance|Risk & Analytics
Insurer Solutions

November 18, 2020

After a period of difficult years, ILS capacity providers and ILS capacity users alike remain committed to the market.

Survey scope: A wide angle market lens

Willis Towers Watson’s Global Insurance-Linked Securities (ILS) Market Survey provides a snapshot of the views of the broad constituents that make up the ILS industry. The breadth and depth of expertise in Willis Towers Watson’s Investment, Risk and Reinsurance business and Corporate Risk and Broking business allow us unique access to all these market participants (see diagram below).

The breadth and depth of expertise in Willis Towers Watson’s Investment, Risk and Reinsurance business and Corporate Risk and Broking business allow us unique access to end investors, ILS funds, insurance and reinsurance companies and corporate risk managers.
Securities business is conducted through appropriately licensed Willis Re Securities entities.

Survey highlights

Key findings from the constituents of the ILS market

End investors

  • A large majority of institutions have been investing in ILS for at least five years; based on that experience only 5% are slightly dissatisfied with investment performance to date.
  • Just over three-quarters of end investors allocate between 1% and 5% of their assets to ILS, with a further 9% exceeding 5%.
  • Beyond natural catastrophe risks, weather insurance and life, accident and health are seen as the most acceptable areas for investment; cyber is less so (Figure 1).
  • Market disruptions from catastrophe losses in 2018/2019 and COVID-19 have not significantly dented enthusiasm for ILS investments. Over 80% of end investors either expect to increase their ILS allocation in the next 12 months or expect it to be unchanged.
  • About a third of participants indicated that due to COVID-19 they had to postpone planned new investments.
  • End investors cite transparency as the most important characteristic of a good ILS manager. Flexibility to invest across a full range of ILS opportunities and low management fees also rank as key desirable characteristics.
Beyond natural catastrophe risks, weather insurance and life, accident and health are seen as the most acceptable areas for Insurance-Linked Securities investment; cyber is less so.
Figure 1. Risk areas that end investors consider suitable for ILS investment mandates

ILS funds

  • In 2020, ILS funds have moved more investment to retrocessional reinsurance. On average, 37% of an ILS portfolio is now allocated to retro compared with 25% in 2018.
  • ILS funds are rather less bullish in their expectations of market growth over a five-year period than in the 2018 survey but remain positive. The 92% of those who thought market growth would exceed 10% in 2018 has fallen to 60% (Figure 2).
  • Property risk, aviation and satellite, and terror are the most attractive non-life risks for ILS funds’ future growth. Over 70% of ILS funds report that end investors are supportive of investment outside property catastrophe risk.
  • 80% of ILS funds expect climate change to create significant threats and opportunities for the ILS market over the next five years.
  • Trapped collateral has been an issue over the past few years, although the amount at year-end 2019 was perhaps, on average, less of an issue than the industry buzz would suggest. At the end of 2019, two-thirds of ILS funds say their trapped collateral is in the 0% to 5% range. Note that the trapped collateral responses did not take into account the potential impacts of COVID-19.
Insurance-Linked Securities fund managers are rather less bullish in their expectations of market growth over a five-year period than in the 2018 survey but remain positive. The 92% of those who thought market growth would exceed 10% in 2018 has fallen to 60%.
Figure 2. ILS market growth in the next five years, 2018 versus 2020

Insurance and reinsurance companies

  • The use of ILS remains stable over the past two years, similar to 2018, with over half (56%) of insurance and reinsurance companies accessing ILS capacity; however, only 17%, compared with 27% in 2018, still derive more than 20% of their capacity limit from ILS (Figure 3).
  • 63% of North American insurance and reinsurance companies access ILS capacity, slightly more than their international counterparts (53%), while also typically originating more than 10% of their capacity limit. The majority (74%) of international insurance and reinsurance companies source ILS for less than 10% of their capacity.
  • Use of collateralized capacity on traditional programs has increased from 53% of respondents in 2018 to 69% in 2020, while the use of capacity backed by cat bonds has also increased by 8%.
  • Diversity of capacity is the primary attraction of ILS for 83% of respondents, but international insurance and reinsurance companies also widely cited the marketing/innovation aspect of ILS.
  • Of the two-thirds of respondents that have recovered claims from reinsurance backed by ILS, 63% said the process was easier or no different from recovery from a traditional reinsurer.
The use of Insurance-Linked Securities remains stable over the past two years, similar to 2018, with 56% of insurers and reinsurers accessing ILS capacity; however, only 17%, compared with 27% in 2018, still derive more than 20% of their capacity limit from ILS.
Figure 3. Comparison of ILS proportion of capacity limits, 2018 versus 2020

Corporate risk managers

  • Diversification of capacity is the most attractive aspect of ILS.
  • While just over a third expect to use ILS in the next three years, most other risk managers remain open to accessing it (mainly for multiline covers) if they have more information.
  • The main sorts of information they are looking for are the relative sustainability of (re)insurance capacity versus ILS capacity (73%) and relative claim payment history (64%).

Survey participation

Our web-based survey of 122 global ILS participants was fielded between June and August 2020. This constituted 58 providers of ILS capacity and 64 capacity users including insurance and reinsurance companies and corporate risk managers. The survey captures global and regional trends with 44% of capacity users respondents coming from North America and 56% coming from the rest of the world.

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