Fundamental strength of ILS asset class remains: Schroders Capital

Although the frequency and severity of claims in recent times has hindered returns in the insurance-linked securities (ILS) market, the fundamental strength of the asset class remains, according to Stephan Ruoff and Mark Gibson of Schroders Capital.

In a recent showcase sponsor video interview ahead of the upcoming Artemis ILS NYC 2022 conference, held April 22nd in New York City, of which Schroders Capital is a Gold sponsor, we spoke with Ruoff and Gibson about market dynamics on the back of some costly years for the risk transfer space.

“I think, first and foremost, the fundamental strength of the asset class remains,” said Ruoff.

“It’s an uncorrelated asset class that provides investors with a decorrelated return. But secondly, and I think this is quite important in the current situation that we’re facing, the asset class is inflation shielded to some extent, and it’s based on a floating rate product, which means inflation cannot necessarily filter through to a very, very large extent.”

“Thirdly, I think the non-correlated characteristics of the asset class are important in the way that you’re investing in insurance risk, and pure play insurance risk by nature, natural catastrophes, or risks that are man-made, which means they are not interacting with financial risks at all,” he added.

All of this, said Ruoff, suggests that the fundamental strength of the asset class will persist.

Supporting this, another strength of the ILS market that has been evident over the past few years, according to Ruoff, is liquidity.

“And, I think, it’s not just the liquidity per se, which you find obviously in the cat bond product, but it’s the range of liquidity that can be provided through either investment, it can be from a very liquid product to an illiquid product, covering a broad range of investment needs, and to some extent replacing fixed income whenever it’s possible,” said Ruoff.

While the ILS investment thesis remains strong, Gibson highlighted some of the challenges seen in the marketplace in recent years.

“Broadly speaking, I think the principal challenge that we’re seeing is that the last few years have seen frequency and severity claims which have led to less than stellar results,” said Gibson. “And, of course, when you add the pandemic and the potential impact of that or the actual impact of that, depending on what strategy you’re looking at, that clearly hasn’t been a helpful addition to the picture.”

The result is a scenario in which the market is in a period of several years of less than attractive returns, which, Gibson explained has led to a level of contagion from some poor performance or even exit from a manager or two.

Additionally, “The impact of climate change clearly is something which is a topic for discussion and debate. It’s an area of focus for investors when we talk to them… it leads to questions about whether or not the industry, the insurance and ILS industries are able to react quickly enough to deal with that impact.”

Despite the challenges, Gibson feels “the ILS market is still a valid and necessary part of the risk transfer arena,” which provides an extra source of risk-bearing capital which is able to be accessed by educated investors seeking a diversifying investment.

“In terms of going forward, global exposures are going to continue to grow with increased development across risks exposed territories, both in developed and less developed countries. The nature of risk may continue to evolve due to the impact of climate change. So, there’s going to be continued need for people to take risk and to assess risk and try and price for it properly,” said Gibson.

The full video interview is embedded below and can also be viewed in full, along with previous Artemis Live video interviews here.