COVID-19 could ultimately lead to increased interest in ILS structures among investors, according to Henri Winand, CEO of AkinovA, the electronic ILS trading platform that operates in the Bermuda Monetary Authority’s regulatory sandbox.
Winand said: “Judging from the level of interest in ILS and electronic risk transfer we experience, I suspect it will have the same catalyst effect as what happened post 2008.” However, it will take time before the impact can be seen, he added.
Winand called for increased issuance of ILS, from the current level of around $100-$130 billion outstanding, to meet growing demand. “If the ILS universe is not growing, we’ll have too many dollars chasing too few assets,” he warned, driving up prices and dragging on returns.
While there are considerable differences between the crises of 2008 and 2020, both have increased demand for assets with underlying cash flows that are uncorrelated with generic real asset prices and equity prices, Winand said, adding: “ILS fits the bill.”
AkinovA has seen increased demand from pension funds, Winand said, “perhaps because of the mortality rates and age groups hit mostly by this virus, or simply because they seek other asset classes.”
With ETFs particularly badly affected by market volatility in recent weeks, hedge funds - especially those managed by people, rather than algos, have also shown increased interest, he said.
The COVID-19 crisis is encouraging investors to prioritise liquidity, noted Winand. “We see queries on ability to trade, re-trade and not be left with collateral trapped,” he said. “So, it’s natural to see an inflow of requests to trade simpler risk transfer products and instruments which, as a result, will have a larger audience to trade/re-trade.”
Winand said electronic trading is seeing increased interest, partly because COVID-19 is forcing people to avoid human contact, although he stressed that has not been the biggest driver.
“A global insurer saw electronic trading of risk transfer as offering a better path to liquidity,” he said. “With rapid dislocations, ranging from wildfires and pandemics to cyber, there is an increased need to get things done more electronically.” That allows them to dynamically readjust their risk portfolios, he explained.
AkinovA, Henri winand, ILS