ILS diversification up in 2016, U.S. wind share reduced: Munich Re

Insurance-linked securities (ILS) and catastrophe bond issuance diversification was evident throughout 2016, a year that saw the percentage of U.S. wind issuance reduce substantially from the previous year, according to Munich Re.

According to reinsurance giant Munich Re’s data ILS issuance in 2016 totalled $6.7 billion, and was driven in part by increased investor and sponsor appetite for diversification in the market.

In its Q4 2016 ILS Market Report, the Germany-domiciled reinsurance giant highlights strong ILS market diversification, along with a notable reduction in the percentage of U.S. wind transactions.

“Diversification in the market was mainly spurred by an increase in Japan Wind/Quake exposure, particularly via two transactions – Aozora Re 2016 and Nakama Re 2016 (in Q2 and Q3), and an overall lower share of US wind issuance,” said Munich Re.

As shown in the graph below, provided by Munich Re, the share of U.S. wind issuance fell from roughly 55% in 2015 to around 40% in 2016. Which, as shown by the chart is the lowest contribution from U.S. wind ILS deals to overall, annual ILS issuance during any of the last six years.

ILS Market Split into Perils* – Issuance Volume

Munich Re explains that for the above chart it split multi-peril catastrophe bonds into single perils based on their contribution to expected loss, which, further highlights the reduced share of U.S. wind issuance.

Apart from the reduction in U.S. wind and the heightened volume of Japanese exposures seen in 2016, Munich Re highlights further diversification in non-catastrophe-related deals and innovative ILS structures.

This includes operational risks as seen with Operational Re Ltd. from Zurich, mortgage insurance risks with Bellemeade Re II Ltd. (Series 2016-1), and Vitality Re VII Ltd. (Series 2016-1), which offered protection for medical benefit claims level for Aetna.

Furthermore, innovative structures as seen with Generali’s Horse Capital I DAC deal, that provided cover against motor third-party liability losses and Market Re Ltd. (Series 2016-5), the second deal in the market’s history to feature temperature risks, provided further ILS market diversification in 2016.

Artemis’ quarterly ILS & Catastrophe Bond Market reports, of which the Q4 edition also provides some data on full-year issuance trends, explores the composition of transactions issued, throughout the year.

Investors and sponsors alike continue to expand their understanding of the space and as a result the market is far more sophisticated and mature than in the past.

This enables innovative and diversifying transactions to come to market, a trend that was evident in 2016 and that shows little sign of slowing down in the near future as investors appetite for diversifying, uncorrelated ILS investment remains strong.