As the insurance-linked securities (ILS) market continues to expand, it still offers attractive opportunities for investors, with strong results over the past few years bringing increased investor capital into ILS funds, according to Mark Gibson, Senior Investment Director at Schroders Capital.
Providing an overview of recent trends within the market, Gibson discussed how pricing and spreads are evolving.
“We are seeing quite attractive levels still, whilst the market has continued to grow in size, the very good performance of the last couple of years has attracted strong inflows to ILS managers in general. And so, we need the market to continue to grow, at least at the pace of the growth of the investment phase, to maintain that level of pricing, if you like, in the market,” Gibson said.
“One thing that, of course, that good performance does is it increases the AUM’s of funds. So, just the retained performance has created a growth in the assets under management across the ILS market.
“So as a result, there is a stronger bid now than there was in 2023 and 2024 and that has allowed protection buyers to start to push spreads back towards the long-term levels that we’ve seen, although they still remain at historically attractive levels,” he continued.
Moving forward, Gibson also explained why ILS is attracting heightened investor attention.
“There’s been tremendous volatility in other asset classes, mainly due to political and economic environments that we’re involved in at the moment. But also, there’s been an increasing recognition of the benefits of the lack of correlation of ILS to other asset classes, and, of course, the diversification characteristics that ILS provide,” Gibson explained.
“Furthermore, they have a floating rate base, so they’re immune to interest rate changes, which have been a concern to some investors. But also, the real driver at the moment that we’re seeing is that investors habitually buy performance, and we’ve seen record high returns in the last couple of years.”
Gibson further emphasised the structural reasons behind the ILS space’s uncorrelated nature.
“Nothing else that happens in any other market can cause a natural catastrophe event to happen, and the real driver of performance in ILS transactions is the occurrence, or not of natural catastrophes. So, movements in other markets caused by economic shocks or political events don’t cause hurricanes or earthquakes to occur. The GFC and the Covid year proved this lack of correlation. So, it’s demonstrable, if you like.”
He continued: “Furthermore, this lack of correlation effectively gears up the portfolio diversification benefit that we’ve already talked about that ILS provide. So, it’s one thing to be a diversifier and that has some benefit, but if that diversifier is also uncorrelated, that effectively really enhances that diversification benefit and it’s really a key point to make.”
Addressing frequent ILS investor questions around credit risk, Gibson noted that it is generally not a material concern.
“The credit risk which could materialize would relate to the protection buyer, the solvency of the protection buyer, but effectively, if the protection buyer became insolvent during the life of a transaction, that would lead to an early maturity of that transaction, so it doesn’t add to the risk that investors face by investing in that transaction.”
To end, Gibson offers a positive outlook for the future of the ILS market, expressing strong confidence that demand for catastrophe protection will keep rising, which will in turn support ongoing growth of the space, while also noting that the primary pipeline for the end of 2025 and into 2026 looks promising.
“It’s always hard to forecast what’s going to happen in the future because multiple factors are at play. A large catastrophe could occur anytime or not, and that’s going to be a major driver of the direction of travel in the ILS market,” Gibson said.
“We’re starting to find out how the primary pipeline is looking, however, for the end of 2025 and going into 2026. At this stage, it looks as if the market will continue to grow. However, the rate of growth will need to be at least in line with what we’ve seen in the last couple of years in order to ensure that investor demand does not exceed supply, and to support market discipline when it comes to terms and conditions and spread multiples.
“One thing of which I am certain and that is that in the long run, the demand for catastrophe protection will continue to grow and the ILS market will grow successfully, as a result,” he concluded.
