ILS market grows 8% on re/insurer interest, investor confidence: WCMA

by Artemis on January 19, 2016

Total non-life insurance-linked securities (ILS) capital increased by 8% over the course of 2015 to reach $70 billion at the end of the year, thanks to increasing interest from insurance and reinsurance sponsors and growing investor confidence, according to WCMA.

The ILS market “hit new heights in 2015” according to the latest report from Willis Capital Markets & Advisory (WCMA), the capital markets and investment banking unit of global advisory, insurance and reinsurance broking firm Willis Towers Watson.

Interest in accessing the capital markets and ILS investors, for protection through collateralised reinsurance, catastrophe bonds and other capital market risk transfer structures, continues to grow among insurers and reinsurers, WCMA says.

At the same time investor confidence continues to grow, resulting in the market continuing to expand its remit to include new products and perils.

These two factors, which essentially equal greater demand on both sides of the market, have resulted in another strong year of growth for non-life ILS capital, according to WCMA.

The unit recorded total non-life ILS capital at $70 billion at the end of 2015, which it says “far exceeded the record $65 billion level at year-end 2014” growing by an impressive 8% year-on-year.

Net new capital continued to enter the market at the end of 2015, according to WCMA, which suggests that further growth may already have occurred as capital builds up for future cat bond deal allocation and renewal deployment at ILS fund managers.

ILS and capital markets reinsurance products, such as sidecars, industry loss warranties and collateralized reinsurance, all showed considerable growth during 2015, WCMA notes. 2015 also saw the ILS space continue to expand its remit, with a broader array of risks transferred and increasing interest beyond property catastrophe risks, to life, accident & health and casualty risks.

Bill Dubinsky, Head of ILS at WCMA, commented; “Further expansion into new products and perils will require continued innovation and investment. Investors are showing pricing discipline in the current soft market yet there remains clear appetite to deploy capital across a broader array of risks and products as investors continue to become more comfortable with this maturing asset class, as long as investment standards are met.”

WCMA’s report notes that the catastrophe bond market saw lower levels of non-life activity in 2015, but that this was largely because of one-off factors such as multi-year deal inception dates and does not signify any decline in appetite for cat bond coverage. In fact, WCMA explains that the number of deals issued was actually up in 2015.

Dubinsky explained; “Looking at the headline catastrophe bond figure, a decline in issuance appears to be the case. However, this general picture fails to account for the huge $1.5bn transaction completed in 2014 – Citizens’ Everglades Re – which skews any prior year comparison.

“The number of deals in 2015, and transactions such as Azzurro Re, demonstrate that ILS is becoming a core component of many re/insurers’ risk transfer strategies and investor appetite remains strong. We therefore expect continued growth in ILS assets under management in 2016, including growth in catastrophe bonds.”

Looking ahead WCMA says that it expects the ILS market to continue to develop and likely grow, as the market becomes increasingly sophisticated.

However, WCMA is not as bullish as some on the development of new market indices as a catalyst for ILS market growth, or for corporate cat bond sponsors to suddenly become more prevalent.

“ILS growth will not depend entirely on the development of index products or the penetration of cat bonds into the corporate space,” the report explains.

In fact WCMA believes that ongoing growth in ILS will come from “Other sources such as higher leverage and a broader range of risks.”

But overall 2016 is expected to see further sustainable development of the ILS market, with growth likely and interest in ILS as a source of insurance or reinsurance protection continuing to grow.

“Overall, despite the soft market, the ILS market is healthy and of keen interest to institutional investors, insurers and reinsurers, and increasingly to corporates and governments as well,” Dubinsky commented.

“2016 should be exciting not only to see what happens when El Nino recedes but also to see – assuming it continues – how ceding companies, intermediaries and investors react to the continued soft market,” the report concludes.

Note: The figures in the original press release from WCMA were incorrect. A correction was provided, hence the change to 8% growth year-on-year.

Also read:

ILS investor inflows exceed outflows, ILS capital hits $70bn: Willis.

ILS market discipline helps slow reinsurance softening: Willis Re.

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