Insurance-linked securities – Relevant, reliable and growing: PwC

The insurance-linked securities (ILS) sector has proven itself to be a relevant and reliable source of reinsurance or retrocession capacity following the major losses of 2017, while at the same time the sector continues to grow and expand, promising to increase its relevance even further.

Speaking at the firms recent Insurance Summit in Bermuda, PwC ILS leader David Gibbons explained, “The ILS market has shown itself to be both relevant and reliable. After the tragic natural disasters in 2017 and 2018, the ILS market has been there to pay claims and there continues to be an influx of capital to back the renewals of these covers.”

Importantly this ability to take losses, recapitalise and trade forwards has been seen to increase the relevance of ILS and collateralized reinsurance capacity through 2018, as the market has been able to achieve significant growth in the period.

“So far in 2018 there has been over $10 billion in catastrophe bond covers written, the ILS fund market stands at well over $100 billion,” Gibbons explained.

In fact, Artemis’ data tracking the risk capital under management at ILS funds reached almost $103 billion in recent weeks, with the top 10 ILS fund managers contributing an impressive $69.5 billion of that total.

In addition, our directory of ILS and catastrophe bond transactions has now recorded over $12.8 billion of issuance so far in 2018, including mortgage ILS transactions.

As the remit and reach of ILS continues to expand, as evidenced by the growth of areas like mortgage ILS, life ILS and the slow addition of some longer-tailed casualty like lines to an increasing number of portfolios, the relevance of the sector increases in step.

Gibbons commented, “Expanding the definition of ILS to P&C and Life run off books, shows even more growth as both of these segments show the highest level of incorporations in the Bermuda market.”

Further expansion is also being seen in the use of ILS and in particular catastrophe bonds for sovereign risk transfer, humanitarian needs and in privatising risks that have historically sat on government balance-sheets.

“Further, innovation in the ILS sector has assisted in global humanitarian efforts in light of natural disasters. Parametric triggers combined with advanced data analytics and modelling allow the payment of claims at a far faster pace than traditional loss contingent covers so that money can be distributed as soon as it is needed after droughts, hurricanes or earthquakes,” Gibbons said. “Two very meaningful examples of this already happening include the African Risk Capacity Insurance and the Caribbean Catastrophe Risk Insurance Facility.”

The steady expansion of ILS in these ways is also being augmented by further efforts to drive risk capital nearer to the front of the insurance value-chain, as ILS funds and investors get closer to the risk.

All of this is helping the ILS sector to increase its relevance, positioning it as an important provider of reinsurance and retrocession, an increasingly important provider of insurance risk capital and a vital source of disaster risk financing both in the developing and advanced world.

“This alternative capital isn’t quite as alternative. It’s an increasingly large portion of the insurance and reinsurance market globally. And it’s a true form of capital that’s supporting a large part of the globe against significant disasters,” Gibbons said.