ILS advance continues, investor appetite not hit by losses: Willis Re

The insurance-linked securities (ILS) market has continued its advance on global reinsurance markets, with no sign that there has been any impact to investor appetite following the major catastrophe losses of 2017, according to broker Willis Re.

The insurance-linked securities (ILS) market has bounced back admirably following the major losses faced by insurance and reinsurance markets in 2017, with the amount of capital deployed into ILS structures barely dipping and now the market has returned to growth, as evidenced by a record start to the year for the catastrophe bond market.

Reinsurance broker Willis Re discusses ILS market dynamics in its latest renewals report, when it found that ILS’ influence on reinsurance remained strong at the April 1st renewal season, leaving reinsurers hopes of meaningful rate increases dashed.

Willis Re explains that the first signs of ILS market health after the losses was a “rapid reload of Insurance Linked Securities (ILS) funds” following the losses from hurricanes Harvey, Irma and Maria.

The broker highlighted that the loss estimates for these events were initially overstated, although this did not deter ILS investors, with a number of ILS fund managers recapitalising following each storm and raising fresh funds to provide back-up covers to reinsurance buyers.

James Kent, Global CEO of Willis Re, explained that the April renewal saw, “plentiful capacity from both traditional and ILS markets,” explaining that the impact of abundant ILS capacity was “most apparent on property catastrophe pricing.”

Kent went on to explain that, “Insurance-linked securities (ILS) maintains its advance,” saying that the impact of 2017 catastrophes is, “proving limited and this is leading to a continued oversupply of capital, which, in turn, is helping to restrain rate increases.”

Additionally, while there had been discussion of the fact that impacts from less well modelled perils could hurt the ILS market’s ability to recapitalise, this hasn’t been evident either.

“Any potential issues over non-modeled losses, such as California wildfires, have been limited to a small section of the ILS market writing aggregate covers,” Kent explained.

The upshot is that the catastrophe events of 2017 were not sufficient to dent investors desire to allocate more funds into insurance and reinsurance linked investments.

This raises the question of how big such an event would have to be, as it had previously been mooted that it would be either a $100 billion event, or group of events, plus non-modelled perils, that may cause an ILS investor retreat.

2017 saw all of the above, as major losses aggregated into the second half of the year, but still ILS markets demonstrated their ability to deal with claims and to come back prepared to trade forwards and offer investors new opportunities to access the re/insurance markets through their strategies.

As a result, “It appears there has been no impact on appetite,” Kent said.

In fact, Kent highlighted some of the ways ILS fund managers continue to become more sophisticated, some of which has been in response to the events of 2017.

“Many of the larger ILS funds are building up their own analytical skills and developing their “own view of risk,” he explained. “This is helping them manage their investors’ expectations with regard to less obvious exposures.”

This is really important for ILS fund managers, as it will enable them to differentiate more, while becoming a more trusted reinsurance and retrocession partners, so will help them to attract both investors and ceding clients.

The Willis Towers Watson Securities team also commented on the way the ILS market responded to 2017’s loss events, saying that, “Loss development and claims collection from 2017 catastrophe events continues to proceed in an orderly fashion with few surprises.”

Again, the ability to deal with major losses without providing surprises to ceding clients or to their investors, while growing and trading forwards, suggests that the ILS market is on the road to another period of significant growth over the next few years.

Tested, proven and ready to do more of what it has proven so successful at, the ILS market is definitely primed for further growth and we should expect the advance of ILS to continue in reinsurance.

Register now for our upcoming ILS conference, July 12th 2018, Singapore