23 March 2017Alternative Risk Transfer

Pension plans eye ILS as investment opportunity

A recent survey of 100 institutional asset allocators carried out by independent publisher Clear Path Analysis, and sponsored by Nephila Advisors and Credit Suisse Insurance Linked Strategies, has found that more than one in five pension plans are considering new investment into insurance-linked securities (ILS) in 2017.

According to the survey, Insurance-Linked Securities—Asset Owner Insight, global market turbulence, macroeconomic and geopolitical events have meant that UK, European and US interest rates have stayed low, resulting in growing numbers of pension funds turning to alternative asset classes to source attractive yields, particularly those offering uncorrelated returns from equity and bond markets.

The survey found that 22 percent stated they were very likely to start investing in ILS in the next 12 months.

However, institutional investors, particularly pension plans, are still finding the asset class difficult to understand, with 50 percent of plan representatives stating ‘getting trustees comfortable with the asset class’ was the biggest impediment they face to making allocations to the area.

It can be difficult for investors to discern true risk-adjusted performance and whether a manager is delivering good value for the downside risk they are taking on.

Commenting on the survey Adam Beatty, managing director with Nephila Advisors said: “It can be difficult for investors to discern true risk-adjusted performance and whether a manager is delivering good value for the downside risk they are taking on.”

Considering the future of the market and the increasing role multi-asset fund managers could play, Beatty added: “We do feel that over time more of the investor community will find the asset class attractive and so we might expect to see some broadening out into the larger asset managers, perhaps adding it as part of a multi-asset portfolio of investments for their clients.”

Further findings from the survey included that:

  •         78 percent of pension plans stated further recommendations by their own consultants was a key trigger to initial or further allocations, underlining the crucial role advisors continue to play in alternatives allocations;
  •         64 percent of pension plans stated greater inclusion in multi-asset funds would prompt greater interest;
  •         72 percent felt there wasn’t a need for more standalone ILS managers available to allocate to;
  •                   Size and reputation of asset managers is a low priority among asset owners, scoring an average of 2 out of 5 in importance; and
  •                   Almost 80 percent of asset allocators expect 3 percent or less of their overall asset allocations in the next 12 months to be to ILS; but
  •                   For investors that are already in the market, 32 percent intend to allocate more than 3 percent of their overall allocations to ILS by the end of the next 12 months.

Taken as an average, survey respondents expect 4 to 6 percent on their returns over the next 12 months, broadly similar to previous years, and indicating a low level of expectation among investors that new ILS risks will enter the market, offering higher returns.

Niklaus Hilti, head of insurance-linked strategies at Credit Suisse Insurance Linked Strategies, said: “Market participants can buy reinsurance at a relatively low cost, so why should there be a push for innovation? Innovation occurs when there is some pain, which means it becomes very expensive to transfer risk.”

Hilti pointed to life risk as one area where greater innovation in risk packaging for capital markets could occur, commenting: “Life risk, in the long run, can only be profitable if investment returns are higher in the future than they are at the moment. This already creates a certain pressure on insurers to offset at least part of the risk that they hold.”

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