An educational & reassuring year for the ILS market: Paul Schultz, Aon


The past 12-months have been both educational and reassuring for the insurance-linked securities (ILS) market and its participants, as the market learned that its structures do in the main respond as designed.

paul-schultz-aon-securitiesCommenting on the launch of the latest annual ILS market report from Aon Securities, its CEO Paul Schultz noted that while tested to a degree never before seen, the ILS market can take some comfort from the last year.

The major catastrophe losses drove significant impacts through catastrophe bonds and collateralized reinsurance structures that ILS investors back over recent years and while this has challenged some business models significantly, the majority have proven resilient in the face of the worst losses the ILS sector has ever faced.

“In the wake of the recent losses, the suite of ILS transactions and the mechanisms by which they respond have been under the spotlight to a degree not seen before in the sector,” Schultz, the Chief Executive Officer of Aon Securities explained.

“The 12-month period reviewed in this report has been educational for market participants, as well as reassuring, due to impaired bonds responding as designed,” he continued.

It will be reassuring for some in the space to have been through this experience, as proving out the efficacy and responsiveness of the ILS product itself may prove to have been key to developing a market platform that could now support much stronger growth and expansion, we believe.

Particularly so for ILS investors, who while never liking to face losses of course, have at least now experienced the way the market deals with trapping of its collateral, claims and loss payments.

As some of the remaining trapped collateral gets released over the coming months, ILS investors may also learn to appreciate the prudence of some ILS fund managers, in their reserving and setting of side pockets, as well.

Schultz believes that the ILS and catastrophe bond market is now well positioned.

Aon Securities report finds that the ILS market proved resilient through the catastrophe bond losses and loss creep of recent years, further explaining that the ILS sector is now “poised to resume growth” after a plateau in 2018.

Levels of catastrophe bonds issued remains consistent year-over-year, the capital markets unit of insurance and reinsurance broker Aon says.

All despite the most challenging market conditions faced in the history of ILS.

The catastrophe bond market continued to grow as well, reaching a new record for risk-capital outstanding during the period, as we explained recently here.

In particular, the ability of the catastrophe bond market to digest its losses and trade forwards has been impressive.

Aon Securities explained prior to 2017 the cat bond market had only been faced with losses totalling $900 million since its inception.

But, after the hurricanes, earthquakes, wildfires, typhoons and winter storm events of 2017, 2018 and also 2019, the market has seen 25 classes of cat bond notes impaired (we detail these in our Directory here), which has led to anticipated cat bond losses totalling $1.25 billion.

“Deal structures and recovery mechanisms have been tested on a scale never before seen,” Schultz commented.

“This concentrated level of loss was digested by the market during the year under review, with a dramatic impact on the dynamics of capacity, collateral treatment, pricing, and investor sentiment,” he added.

While the market has slowed in the wake of its loss experience, as certain losses continue to develop and claims get slowly paid, Schultz is now confident on the pipeline and prospects.

“After this period of contraction, we expect alternative capital to resume its upward growth momentum later this year and into 2020,” Schultz said.

The recovery continues for the cat bond, ILS and collateralized reinsurance market, but as the catastrophe losses move further into the past it increasingly looks like the test has largely demonstrated the resilience of the asset class and of the risk transfer structures it supports.

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