Over the last 25 years, approximately U.S. $175bn of Insurance Linked Securities (ILS) were successfully issued, and their impact is no longer limited to just catastrophe risk. One of the advantages to clients using ILS is that it provides a diversifying and stable source of capital. Traditional reinsurance solutions are typically subject to annual renewals, fluctuating risk appetites, and market conditions influenced by performance. Institutional investors typically exhibit a slower pace in altering their risk appetites, a stability that translates to a reliable source of capital for insurers, enabling them to manage risk, growth, and performance more effectively and over a longer period of time.
Moreover, ILS can often deliver capital at a lower cost compared with traditional reinsurers. The cost of capital is typically represented by a return on equity, which can range from mid to high teens. By structuring deals efficiently, ILS transactions can potentially lower the cost of capital from between 5% and 7%. Even a modest reduction in capital costs can lead to significant improvements in the insurer's financial performance over time.
Capital solutions are increasingly favoured by our clients. A holistic approach to managing their capital, through structured reinsurance and ILS, can create material economic value. Our clients are accessing flexible and innovative institutional capital that supports not just single lines of business but entire multi-class portfolios. We use sophisticated Bayesian models to help build structures that are truly diversified and aligned with each client’s strategic business goals. By matching client risk appetite with investor interest, we are able to create transactions that unlock meaningful value for both sides.
The insurance market poses an attractive opportunity for investors to diversify their portfolios and achieve stable returns. Institutional investors, such as pension funds, sovereign wealth funds, and private credit funds, are particularly drawn to ILS due to its favourable risk profile and matching duration needs. ILS deals typically have durations ranging from three to seven years, which suits the investment horizons of many institutional investors. Additionally, the structured nature of these deals often results in higher returns with reduced volatility, making them an attractive addition to any investment portfolio.
The value proposition of ILS lies in its ability to provide an asset with low correlation to other holdings, a favourable risk profile, and durations that align with their investment goals. Many investors are eager to apply their investment strategies to manage reinsurance trust assets and deliver a return that is higher than the risk-free rate. These characteristics make ILS a reliable and sustainable source of returns in an increasingly complex and volatile financial landscape.
Looking ahead, the ILS market serves as a reliable capital provider for insurance companies by offering stable and lower-cost capital, while the insurance market provides a diversified and attractive return opportunity for investors. The bespoke nature of ILS transactions ensures that both insurers and investors can find tailored solutions to meet their needs, fostering growth and stability in the insurance industry. As the ILS market continues to evolve, its role in supporting sustainable capital allocation and investment returns is likely to become even more prominent.