Insurance Linked Securities (ILS) are increasing trusted and being invested in by institutional asset owners who would remain invested even after a major hurricane, claims a new survey.
A total of 100 institutional asset allocators were interviewed by Clear Path Analysis for its second Insurance Linked Securities – Asset Owner Insights survey. These interviews were carried out in the wake of the most active hurricane season since 1932 that saw three category 4 or 5 hurricanes make landfall in mainland USA and the US territory of Puerto Rico. The 2017 season ended an 11-year run without a major hurricane making landfall in a US state.
“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,” said Dirk Lohmann, chairman and managing partner, Secquaero Advisors.
Reflecting on the fact that lots of data now exists on the nature and potential destructiveness of hurricanes emanating in the Caribbean, Lohmann added: “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.”
Despite US weather related risk compiling the bulk of surveyed institutional investors allocations (84 percent of total), 80 percent of respondents stated they would at least remain invested in the asset class with 37 percent stating they may look to increase allocations in 2018. With insurance risk carriers expected to offer higher returns on re-insured US 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.
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 $20 billion each is around 1.4 percent, which is in line with the modelled historical hurricane losses. The probability of having three such hurricanes in one season is 0.1 percent 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 percent 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 percent or 3 percent on average, indicating the asset class remains the preserve of those asset owners at the higher end of the assets under management spectrum.
Insurance Linked Securities, ILS, investors, assets, hurricanes, risks, data, survey