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In terms of flows, we’ve actually just observed a record first quarter for cat bond issuance. In April, around $4 billion of cat bonds were being marketed with the expectation that 2017 could be a record year for issuance. What is really nice this year is that we are seeing both a mixture of new and existing investors, as well as new perils being considered

Chris Parry

Managing Director, RenaissanceRe Ventures

Insurance Linked Securities (ILS) are experiencing a prolonged suppression in yields following record returns in 2012 following the tsunami that impacted the Fukushima nuclear power plant and the earthquake in Christchurch, New Zealand, leading to unexpected losses for investors.

Shared opinion from the Insurance Linked Securities for Institutional Investors report, however, has raised several optimistic trends impacting on the sector in the form of ESG trends, cyber and efficiencies arising from block chain.

The first quarter of 2017 has seen new ILS risk issuance as Chris Parry, Managing Director with RenaissanceRe Ventures observes: “In terms of flows, we’ve actually just observed a record first quarter for cat bond issuance. In April, around $4 billion of cat bonds were being marketed with the expectation that 2017 could be a record year for issuance. What is really nice this year is that we are seeing both a mixture of new and existing investors, as well as new perils being considered”

Assessing some of the reasons for the new capital, Eveline Takken-Somers, Investment Director for Credit & Insurance-Linked Investments at PGGM, the Dutch multi-employer pension plan, commented: “Our asset allocation studies indicated that we could allocate more towards ILS. The size of the current ILS market prevents a higher allocation. The access to the traditional reinsurance market might be the key in unlocking more capacity in the overall market”.

Part of the continued demand for ILS also appears to be coming from pension plan, general asset managers and foundation funds desire to be seen as more responsible investors. Barney Schauble, Managing Partner at Nephila Advisors, the world’s largest stand alone, dedicated ILS manager, states:” The primary driver of that interest [in ILS] continues to be a desire for more non-correlated assets, but increasingly the Responsible Investing piece is a bigger part of this conversation”.

However, recent high profile cybercrime incidents are drawing both insurers and ILS asset allocators attention to the potential of cyber as an ILS compatible peril. Benjamin Jacquet, ILS Underwriter & Cyber Risk Expert at Credit Suisse ILS Strategies comments: “It varies a lot from cyber insurer to cyber insurer, as well as by type of product within a cyber portfolio. But 40% - 60% of loss ratio is something that we see and is something which is pretty healthy”.

Essentially, the ILS sector, following four years of ever constrained returns has collectively looked at how to harness external industry developments, for the sectors own benefit. Robert Lindblom, Partner with Entropics Asset Management, states: “I think it could be summarized in one word: Innovation. … another aspect is rapid technological development, such as the research of blockchain solutions and several initiatives to improve the liquidity of the market by developing market places. Being a young market, the ILS sphere will probably adapt fast to technological and commercial change than more traditional institutions.”

You can get your free full copy of the Clear Path Analysis report here Insurance Linked Securities for Institutional Investors.

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