Demonstrated value of ILS during COVID to drive capital to the market: Aon

The fact insurance-linked securities (ILS) such as catastrophe bonds and other reinsurance-linked assets clearly demonstrated their value during the height of the COVID-19 pandemic financial market volatility, is likely to draw investors to the sector, Aon Securities believes.

The most negative effect of the pandemic on catastrophe bonds was a brief pause in issuance, for around a month at the height of the global lockdowns in late March into April.

Aside from that, the cat bond market came under selling pressure, as investors needed to free up capital from performant assets that hadn’t lost their value at a time when equity and debt markets were in turmoil.

“The strong performance of the uncorrelated assets made this market a source of fresh capital to take advantage of distressed asset valuations,” Aon Securities explained in a recent market report.

“The ILS market reacted positively, with capital meeting selling pressure, driving only modest price movements, even at the very worst of the market,” the insurance and reinsurance brokers capital markets unit further explained.

ILS and catastrophe bonds in particular were “especially promising, in comparison to the traditional markets” in this regard, demonstrating the value of the asset class once again.

Aon Securities said, “The movements in this market as compared to other asset classes have re-demonstrated the value in this market that was proven in the 2008 Financial Crisis and 2010 – 2012 European Debt Crisis.

“The fundamentals of this asset class have not changed and the characteristics of the out performance in this market versus comparable markets were well received by investors.”

There remains “considerable uncertainty” in broader capital markets, the company said, but it added “we see the catastrophe bond market in a strong position.”

Reinsurance market hardening is going to drive ILS issuance on a case by case basis, the company believes, while capital inflows will depend to a degree on what is happening elsewhere in the capital markets and investment world.

“But with equity and debt markets pricing close to pre-crisis levels in some cases and with a prolonged low interest rate environment, the demonstrated value of the ILS markets will drive capital to this market,” Aon Securities concluded.

For the ILS market, patiently waiting out the volatility elsewhere, while working to improve returns and terms in portfolios, should yield dividends as the capital is drawn into this market by its performance in recent months.

It sets the scene for a potential period of much stronger inflows than have been seen for two years, especially if major losses, of the kind to trigger catastrophe bonds, remain lower than the last few seasons.