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The Actuary The magazine of the Institute & Faculty of Actuaries

Non-life ILS capacity hits near-record high

The insurance-linked securities (ILS) market has enjoyed significant growth this year, with non-life capacity issued or outstanding at a near-record high, research by Willis Re has uncovered.

Continued growth expected ©iStock

The findings show that there was $27.3bn (£21.2bn) of non-life capacity issued or outstanding at the end of the third quarter, exceeded only by the $27.8bn recorded for all of 2018.

Willis Re said that the ILS sector has reached a “dynamic equilibrium” and is well positioned for expansion, with alternative capital in all its forms clearly growing again.

“The ILS market is at an important inflection point,” said CEO, William Dubinsky. “Starting in quarter four, we expect growth in more liquid forms of ILS, particularly catastrophe bonds.”

However, the researchers warned that the rising tide of alternative capital would not lift all ships, with some managers, sectors and strategies benefitting, while others remain under stress.

For example, capacity remains restricted for ultimate net loss (UNL) retrocession, with only limited interest so far from new investors. 

Meanwhile reduced loss creep, higher premiums, and the associated improved risk-return profile have provided a tailwind that should prompt new issues.

“Some investors are realigning their portfolios towards investments with lower projected losses, as they see increasing relative value at the more remote end,” Dubinsky said.

“That could bode well for cat bonds. Sidecar interest has picked up as well, but the extent to which this will translate into deals will depend on the opportunities presented to investors.” 

The researchers said that a desire to satisfy unmet needs, such as closing the disaster gap or helping pensioners diversify their investments, was prompting the transfer of new risks.

Moreover, there is a growing awareness that governments can play an important part in facilitating risk transfer, especially to ILS investors when private markets fail to do so on their own.

“We also see a growing appreciation of the benefits of risk transfer by cedants, especially countries, coupled with the constraints of the traditional reinsurance capital structure to efficiently solve really big problems without ILS capital partnerships,” Willis Re said.

“The promise of ILS to policyholders is to indirectly make insurance more available and affordable in conjunction with the broader industry. ILS is once again poised to grow and support this objective.”

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