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The Actuary The magazine of the Institute & Faculty of Actuaries

Record year for insurance-linked securities market

There were 35 catastrophe bonds worth a total of $10.7bn (£7.6bn) issued in 2017, signifying a record year for the insurance-linked securities (ILS) market.

Extreme weather events impacted pricing of catastrophe bonds ©Shutterstock
Extreme weather events impacted pricing of catastrophe bonds ©Shutterstock

That is according to a new report from Aon Securities, which shows that the previous annual issuance record of $8.38bn in 2007 had already been surpassed by the end of June last year.

In addition, the capacity of all catastrophe bonds active in the market totalled $25.7bn at the end of 2017 – another new record – while alternative capital reached an all-time high of $89bn.

This momentum is expected to continue, with Aon forecasting catastrophe bond issuance to reach up to $9bn in 2018 as new sponsors and investors enter the sector.

“The ILS market had a very strong 2017, with several new records being set and alternative capital rising to new heights in the reinsurance marketplace,” Aon Securities chief executive officer, Paul Schultz, said.

“We expect to see a gradual broadening of the scope of ILS products, making them an even more common risk transfer tool for re/insurers, with continued support from investors for this diversifying asset class.”

Aon said that while a series of extreme weather events impacted the pricing on certain catastrophe bonds in 2017, the market managed to overcome the challenge, with new capital entering the sector.

The findings are backed up by a separate report by Willis Towers Watson Securities, which shows that non-life ILS capital increased by 17% over the course of last year.

It argues that the ILS market was able to withstand several natural catastrophe losses last year, with funds diligently reaching out to investors and risk partners, ensuring an orderly and supportive environment.

In addition, it shows that ILS capital is looking to both the short-term potential for modestly better risk spreads, and the longer-term opportunity to partner with reinsurers, insurers and insureds.

“We see no end in sight to ILS growth – the ILS community is signalling that it is ready and open for business,” Willis Towers Watson Securities managing director, Bill Dubinsky, said.

“2018 is shaping up as a brutal battle for market share between, on the one hand, incumbent reinsurers and ILS investors trying to both maintain their positions and exact some rate increases and, on the other hand, other ILS investors and reinsurers trying to stake a claim to participate in additional risk.”

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