ILS market hits $75bn, diversification of asset class expands: WCMA

Insurance-linked securities (ILS) issuance throughout 2016 remained strong in a tough operating landscape. Total market capacity reached a high of $75 billion in 2016, driven by continued investor appetite for increased diversification of the asset class, according to WCMA.

The ILS market grew by 7.1% during 2016, increasing from the $70 billion reported at the end of 2015 to an impressive $75 billion, according to the latest ILS market report from Willis Capital Markets & Advisory (WCMA), the investment banking operation of re/insurance broker Willis Towers Watson (WTW).

“The size of the ILS market continued to grow in 2016, reaching $75 billion. Growth alone was not, however, the whole story as diversification by peril became increasingly important to investors, as did different approaches to liquidity and leverage, dependent on each investor’s appetite for ILS risk,” said Bill Dubinsky, Head of ILS, WCMA.

The ILS market continues to grow both in terms of its size and its influence in different geographies and risks around the world, something that WCMA says was evident throughout last year and that it expects to continue in 2017, driven by investor appetite for diversification.

As shown in the Artemis Q4 2016 Catastrophe Bond & ILS Market Report and highlighted by WCMA, the final quarter of last year is a good example of the strong issuance and diversification trend seen in the marketplace.

More than $2 billion of non-life catastrophe bond issuance came to market in the fourth-quarter of 2016, compared to $1.4 billion in the same period in the previous year, says WCMA.

Despite issuance coming exclusively from repeat sponsors, ILS issuance in Q4 gave investors some welcomed diversification, in the form of motor third-party liability risk, Australian cyclone and Australian earthquake, as well as more common perils such as U.S. named storm and severe thunderstorm, and California earthquake.

The WCMA report explains that $75 billion in ILS asset under management (AuM) no longer means $75 billion in limit, as a number of sidecar and reinsurance premiums provide additional leverage. While this might be the case, it’s important to remember that this isn’t necessarily something new as sidecar and some collateralised reinsurance transactions have included diversifying risks such as marine and energy, for some years.

“Our 2017 baseline is that we expect AUM to grow at a similar pace to 2016. Nonetheless, leverage will grow more rapidly as investors use fronting and similar techniques to enter insurance and reinsurance. This could mean more capacity and more competition even if AUM grows more modestly,” said WCMA.

Similar growth this year as seen in 2016 suggests that the ILS market could reach $80 billion+ by the end of 2017, and with diversification of the asset class expected to continue the acceptance and utilisation of the ILS space could increase.

Rival broker Aon already has the ILS market size at $78 billion and we would venture that the amount of ILS and direct capital market money being deployed through ILS funds and other structures is likely greater than $80 billion already.

“Our 2017 expectation is that assets under management will continue to grow at roughly the same pace as in 2016. Leverage and diversity will also increase, led by a greater level of sophistication amongst the established investor base. At the same time, newer investors will continue to seek the greater liquidity that the traditional cat bond product offers,” said Dubinsky.

In order for the asset class to continue down the same growth path it has grown accustomed to in recent years, market analysts and observers had previously noted a need for the sector to expand into new, diversifying business lines and geographies. And this is exactly what WCMA expects to continue happening in the coming months, suggesting further convergence of the ILS and traditional reinsurance marketplace, driven by investor appetite and demand.