End investors shun cyber ILS: Willis Towers Watson


Only 5 percent of ILS end investors are attracted to the idea of investing in securitised cyber risk, according to the new Global Insurance-Linked Securities Market Survey Report from Willis Towers Watson.

End-investor respondents to the Willis report identified non-catastrophe weather insurance (64 percent) and life, accident & health risks (46 percent) as suitable for ILS mandates, but less than a quarter of ILS end investors found appeal in ILS for other perils. 

The report, which surveyed ILS market participants globally, found that over 80 percent of end investors expect to either increase their overall ILS allocations in the next 12 months - or expect it to be unchanged.

It found that 86 percent of ILS funds expect market growth of 5 percent or more cumulatively during the next five years, although around a third of end investors indicated they had postponed new ILS allocations as a result of COVID-19. 

Two-thirds of ILS funds had trapped collateral of 5 percent or less of their assets under management at the end of 2019, before the impact of COVID-19 had been felt, according to the report. 

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 report added. 

Meanwhile, the report found that more than half of reinsurance and insurance companies (56 percent) now use ILS capacity, while the use of ILS has remained stable over the last two years. Only 17 percent  derive more than 20 percent of their capacity limit from ILS, however, down from 27 percent in 2018.

In North America, 70 percent of the re/insurers 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. 

The Willis report surveyed 122 global ILS end investors, ILS funds, re/insurance companies and corporate risk managers, between June and August 2020 to provide a snapshot of the views of the ILS industry. 

William Dubinsky, managing director at 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 at Willis Re International, noted the survey had revealed disconnects in the industry between re/insurers that would like to use ILS capacity to protect risks like cyber and casualty, and end investors that have little appetite. 

“Investors and funds see steady growth ahead, but some buyers have been more restrained in their behaviour towards ILS,” she said. 

Matthew Ball, ILS consulting leader for insurance consulting and technology, highlighted evidence of improvements in the areas of governance and transparency. “The number of ILS funds appointing independent third-party valuation agents for illiquid (level three) assets has increased from a third in 2018 to just over a half in 2020,” he noted. “This is probably not surprising, in light of the catastrophe events of recent years. The end investors agree – they cite the level of reporting and transparency as the most important characteristic of a good ILS fund – above low fees.”

Willis Towers Watson, Insurance linked securities, William Dubinsky, Nadia Schmidt, Matthew Ball

Bermuda Re