ILS increasingly attractive in the face of COVID-19

As an asset class that is uncorrelated with financial markets, provides environmental, social and corporate governance (ESG) advantages and offers good returns in the current low interest environment, insurance-linked securities (ILS) are becoming increasingly attractive, Kirill Savrassov, an ILS and sovereign risk transfer specialist, told Intelligent Insurer.

ILS activity is gaining momentum because COVID-19 has highlighted the benefits of investing in an asset class that is uncorrelated with financial markets, said Savrassov.

“Another important point is that uncorrelation, together with current price increases in the reinsurance market, is making this asset class not only attractive but also reasonably priced, with good returns,” he said.

“The overall result will be the entrance of more institutional investors to this area.”

He added that parametric solutions are more advanced in the ILS world and provide some unique advantages, including speed.

“For example, if you look at sovereign parametric cat bonds introduction, something like regional pooling takes years at best, whereas issuing bonds is a pretty straightforward and simple process.

“Any country which has already borrowed money through Eurobonds is infrastructurally ready to issue cat bonds—it is something you can make within a reasonable period of time.

“It gives important access to emergency funds very quickly, thanks to its nature and the track record of parametric triggers—which are well understood by all parties, simple and transparent. I think a very big part of the future of re/insurance sits in these ILS techniques and products.”

Emerging markets
Savrassov added that there is great potential for ILS in emerging markets—the transit countries of China’s Belt and Road Initiative being a case in point.

“The Belt and Road countries are getting huge investment from China and from regional development banks for building up critical transport infrastructure,” he said. “In the meantime, the infrastructure in this earthquake-prone region is not properly covered by insurance because insurance is very much underdeveloped there.

“For these and other underdeveloped markets, ILS is particularly preferential because they are getting infrastructure cover for tomorrow instead of spending years increasing insurance penetration and developing the insurance market.

“They can get almost immediate access to a means of shortening the coverage gap, so countries that experience the largest insurance gap should probably be first in the queue for the development of ILS products.”

He also sees increased potential for ILS as climate change becomes a more pressing issue.

“Things are going to get worse and one of the areas to suffer most will be agriculture,” he said.

“This plays in favour of the use of ILS as an effective and rapidly achievable instrument. The only problem is the quality of the triggers applied for its transparency and simplicity, which must be well understood and accepted by investors and issuers.

“However, it’s quite easy to come to a compromise, and once compromise is achieved it’s a very good balance from an economic point of view.”

He added that investor appetite for ILS is also being driven by its ESG qualities—for example, its ability to provide disaster relief.

“Investing in ILS has direct links with ESG, which is on the board level agenda of every company now,” he concluded.