ILS continues to grow despite softer and more competitive reinsurance market: Moody’s Ratings

Strong investor demand and record catastrophe bond issuance, underpinned by increased participation by both insurers and reinsurers, is supporting the continued expansion of the insurance-linked securities (ILS) market, as Moody’s Ratings reports that carriers are using ILS more strategically in the competitive reinsurance market environment.

Citing broking group Aon’s USD 144.5 billion total for the level of ILS capital in the global reinsurance market at half-year 2026, Moody’s Ratings says that the six month period has “reaffirmed the ILS market as a deep and resilient source of insurance risk capital.”

The strong growth in ILS capital has been supported by growing investor interest in the asset class as catastrophe bond issuance again broke records in the first half of 2026, strengthening the share of ILS within insurers’ and reinsurers’ risk-transfer programmes.

As highlighted by Moody’s and also our quarterly cat bond and related ILS market reports, the market continues to broaden with a record number of first time sponsors entering the cat bond market in the period.

“Many cedants renewing maturing bonds also increased their protection, in a sign that they are moving larger shares of their risk transfer programs to the capital markets – in part to lock in the current softer pricing and hedge against future price increases,” says Moody’s.

As well as strong cat bond market expansion, Moody’s notes Aon’s estimate that reinsurance sidecars grew to roughly USD 23 billion of outstanding investments, reflecting growth of around 50% since the end of 2024.

“Taken together, these trends amount to a structural shift. Insurers and reinsurers are making greater use of ILS, including collateralized reinsurance, sidecars and catastrophe bonds, selecting the most appropriate and cost-effective source of capacity for each risk,” explains Moody’s.

In its report on the global ILS space, Moody’s also explores how softening reinsurance market conditions are altering the economics of ILS, as ample capacity and a relative lack of large industry losses weigh on traditional reinsurance pricing and catastrophe bond spreads.

As we’ve reported previously, the Guy Carpenter US Property Catastrophe Rate-on-Line Index declined by some 16% over the 2026 renewals, leaving pricing around 22% below the hard market peak in 2024, although rates remain well above the low of the previous soft market.

Moody’s states that cat bond spreads have followed the traditional market lower since early 2024, driven in part by record inflows competing for risk as the average expected loss of new issuance moved higher.

Moody’s explains, “Pricing has compressed most sharply on remote tail-risk layers and less so on lower, higher-frequency layers, where the risk of loss is higher. This mirrors the traditional market, where demand for protection against high frequency catastrophe events is strong and supply tighter than for less frequent peak-peril tail risk.”

Despite falling spreads, Moody’s believes that the asset class continues to generate good returns for investors, highlighting the Swiss Re Global Cat Bond Index, which returned 11.4% in 2025 and 4.1% in the first half of 2026.

“For sponsors, ILS retains clear appeal through pricing that is very competitive with traditional reinsurance, multi-year pricing certainty, diversified capital and collateralized protection,” says Moody’s.

Moody’s also discusses the fact investors in the ILS space are now committing more capital to structures with higher underlying risk of loss, such as aggregate covers, frequency protections and secondary perils, driven by moderating ILS pricing as they seek stronger returns.

At the same time, innovation is broadening the scope of capital market solutions, according to Moody’s.

“The growth of sidecars, collateralized reinsurance and casualty-oriented structures also introduces new risk considerations. Asset- intensive life reinsurance sidecars have expanded quickly as life insurers partner with asset managers to support long-dated annuity liabilities. These carry significant asset risk, since higher-yielding and often less liquid assets back the liabilities. In contrast to property- catastrophe ILS, these structures also frequently collateralize reserves rather than the full reinsured limit.

“On the property and casualty side, sidecars increasingly support MGA-originated business, where underwriting quality is harder to assess given limited operating histories and sparse public disclosure. Such vehicles often reach beyond property catastrophe into risks that are less standardized and harder to model, including longer-tail casualty lines where losses may emerge only years after underwriting,” says Moody’s.