London: The second edition of a recent survey of 100 institutional asset allocators carried out by independent publisher Clear Path Analysis, found that institutional asset owners are increasingly confident in allocating to Insurance Linked Securities (ILS) and would remain invested even after a major hurricane.
The results of the Insurance Linked Securities – Asset Owner Insights survey come on the back of the most active hurricane season since 1932 that saw three category 4 or 5 hurricanes make landfall in mainland USA and the U.S. territory of Puerto Rica. The 2017 season ended an 11-year run without a major hurricane making landfall in a U.S. state.
However, despite U.S. weather related risk compiling the bulk of surveyed institutional investors allocations (84% of total), 80% of respondents stated they would at least remain invested in the asset class with 37% stating they may look to increase allocations in 2018. With insurance risk carriers expected to offer higher returns on re-insured U.S. weather risk in 2018 to capital market investors, many pension plans and other asset owners appear savvy to the opportunities and are sticking by ILS in the hoping of benefitting.
Dirk Lohmann, Chairman and Managing Partner, Secquaero Advisors, commented in the survey report: “One should take a longer-term perspective when allocating to the asset class and be willing to tolerate a certain degree of volatility as long as it is within the projected margins that were indicated when they first made their allocation”.
Reflecting on the fact that lots of data now exists on the nature and potential destructiveness of hurricanes emanating in the Caribbean, Lohmann said: “It is important for everyone to understand that if you stick to risks that have good data and modelling you can get a good verification of the price of the risk transfer”.
Asset owners are likely to turn their attention to the forecasts starting to appear as to the likely events of the September 2018 onwards typical hurricane season and if it will come close, match or even exceed 2017’s events. Berit Gehring, Head ILS Product Specialist at Credit Suisse Insurance Linked Strategies, wrote in the survey report: “The question therefore is: has the 2017 hurricane season been exceptional or will 2018 follow with equal or worse hurricane activity, just like 2005 followed 2004? And was the high frequency of major hurricane landfalls in 2017 coincidence or climate driven?”
Statistics available make the likelihood of two years of such above average hurricane activity unlikely, as Gehring goes on to explain: “In general, based on insurance catastrophe modelling, the probability of having two hurricanes in one year causing insured losses of more than USD 20 billion each is around 1.4%, which is in line with the modelled historical hurricane losses. The probability of having three such hurricanes in one season is 0.1% or once in 1,000 years.”
Despite ILS confidence being up, the potential for new investors entering the asset class remains muted but not non-existent, as 70% of those surveyed who do not hold ILS think it unlikely that they will become invested in the next 12 months. This was re-enforced by the survey finding, ILS held in a portfolio is unlikely to exceed 2% or 3% on average, indicating the asset class remains the preserve of those asset owners at the higher end of the Assets under Management (AuM) spectrum.
Further findings from the survey included that:
- Almost half (46.94%) of respondents have in excess of 31% of their Assets under Management (AuM) in alternative investments, compared to 18.6% in 2017. It suggests there is a greater appetite for risk in the market, as investors with allocations of between 16 and 30% would appear to have largely increased their allocation to ILS.
- Growing confidence in allocating to this asset class seems to be supported by the fact that no investor would switch their allocation based simply on the fact their consultant doesn’t offer a recommendation. In 2017, this figure was almost 1/3 (30%).
- Further indications of the degree of caution is apparent in the increased diversification of perils in the ILS allocations of the respondents. Allocation to natural catastrophe risk is down to 43.88% from 50%, but this is not unsurprising given the number of natural disasters occurring in the past year.
Notes to Editors
To obtain a full copy of the Clear Path Analysis survey on ‘Insurance Linked Securities – Asset Owner Insight 2018’ and/or speak with one of the commentators please email: julieknowler@clearpathanalysis.com or call +44 (0)20 7688 8511 or click the following link: https://goo.gl/H4TmY3.
About Clear Path Analysis
Clear Path Analysis is an impartial, independent publisher and events producer on pressing industry issues written by a cross-section of experts in the financial services and investment sectors. Clear Path Analysis, established by Noel Hillmann in January 2010, is headquartered in London with an office in San Francisco. For further information, please visit www.clearpathanalysis.com.
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