ILS market comfortably weathers first major test: Willis Re

The insurance-linked securities (ILS) market and alternative sources of reinsurance capital have comfortably weathered their first major test, in the form of the major catastrophe losses during 2017, according to insight from broker Willis Re.

After the impacts of major hurricanes Harvey, Irma and Maria, as well as other catastrophe losses from earthquakes and wildfires, “there was a prospect of significant market disruption,” according to James Kent, Global CEO of Willis Re.

“However as the post event landscape evidenced that the traditional reinsurance markets were facing large but not market dislocating losses, discussions moved onto the expected resilience of the ILS market and, in particular, the impact on reinsurers’ retrocession capacity and costs for 2018,” Kent explained.

It quickly became apparent that the worst fears, of a significant capital locking event for ILS funds and an inability to trade forwards with sufficient capacity to satisfy cedent demands, were unfounded and the ILS sector was putting itself into a position where not only could it trade forwards, but in some cases with greater size and scale.

Kent said, “By the middle of Q4, it became apparent that the ILS market was comfortably weathering its first major test for a number of funds, with investors prepared to recapitalize to make good both lost and illiquid trapped capital.”

Kent highlighted the continued growth witnessed in ILS capital which the brokerage estimates, “Totals approximately US$75 billion today as compared to US$24 billion in 2011, US$10 billion in 2005 and only US$4 billion in 2001.”

Regular readers will now that we put the current ILS market size significantly higher, with over $86 billion of assets under management listed in our ILS fund managers directory.

The ongoing entry and supply of capital in reinsurance has resulted in a markedly different set of dynamics at this renewal than reinsurers would likely have anticipated. Kent said.

“Although the losses have stopped a further downward movement in risk-adjusted rates in most markets and classes, the continued supply of capital has helped curtail widespread increases in risk-adjusted rates particularly on loss free portfolios,” he continued.

ILS investors have suffered a “considerable amount of natural catastrophe losses in H2 2017” Willis Re explained, with private ILS transactions suffering much larger losses than catastrophe bonds.

However, the fears of this resulting in a dislocation or malfunction of the ILS market have not manifested and even the issue of trapped capital “appears overstated with a few notable exceptions” the broker said.

“ILS investors have replenished their capital and continue to trade forward with modest spread increases for loss affected perils,” the broker explained.

Which is perhaps the best example of a market that has successfully weathered a major loss storm. As we wrote just after the hurricanes, it’s not the size of the losses but rather how the market reacts that matters.

Willis Re noted that fears of a capacity crunch, particularly in retrocession, “were quickly dismissed as the ILS market reloaded.”

In comfortably weathering its first major test the ILS market has demonstrated that it is here for the long-haul and as a result it’s safe to expect further growth and expansion as the ILS market continues to mature.

Also read: Capital curtails 1/1 renewal rate rises, disappointing reinsurers: Willis Re.