ILS market expansion to continue through 2018, Sidley predicts

Global law firm Sidley Austin LLP (Sidley) is anticipating the continued expansion of insurance-linked securities (ILS) and alternative reinsurance mechanisms in the months ahead, as traditional players increasingly utilise the capital markets to their benefit.

“As in 2017, we expect that ART (alternative risk transfer) mechanisms in the P&C market will continue to become more prevalent in the year ahead, and the insurance asset class, as a whole, will continue to attract new participants and new capital, particularly following the ILS market’s response to the 2017 events,” says Sidley, in its March 2018 Global Insurance Review.

In the aftermath of the extremely costly third and fourth quarter of 2017, as a result of numerous devastating natural disasters, the response of the ILS market was at the forefront of re/insurance industry discussion.

2017 witnessed a record-breaking level of catastrophe bond issuance, and as the overall volume of third-party reinsurance capital continued to expand, ultimately claiming a larger slice of the overall reinsurance capital pie, industry noised questioned its permanence after the impacts of 2017 catastrophe events.

But the market responded well, claims were paid and importantly, investors didn’t run for the hills and exit the market in a flurry, and instead, ILS capital reloaded and actually expanded in time for the January 1^st, 2018 renewals season, a trend Sidley expects to persist in the year ahead.

“We expect another strong year for catastrophe bond issuance. Despite the recent spate of catastrophe events, investor demand remains very strong, as highlighted by the February 2018 US$1.36 billion World Bank issuance.

“We expect that traditional reinsurers will continue to explore new mays to use third-party capital to their benefit,” says Sidley.

The law firm raises a valid point, as catastrophe bond issuance set a new issuance record in Q1 2018, meaning that catastrophe bond issuance has set a new record in the first-quarter for five consecutive years, as shown by the Artemis Deal Directory and Artemis quarterly ILS market reports.

As well as continued growth in the catastrophe bond market, Sidley also expects ILS to expand its remit and to access new perils and territories, something many industry have said is needed in order for the alternative capital space to really expand the pie and shift its focus from the highly competitive property catastrophe arena.

“In addition, we expect that the ILS market will continue to expand lines of business and perils covered. In particular, emerging insurance needs for flood and cyber risks are potential growth opportunities for insurers and reinsurers who have the expertise to underwrite these risks.

“We also expect sponsors to continue to bring new risks to the market as investors become increasingly sophisticated and able to assess these risks,” explains Sidley.

We saw this just this week with the emergence of the first financial guarantee insurance ILS transaction, Fidus Re Ltd.

Furthermore, the months ahead could also see the specialist Lloyd’s of London marketplace sponsor an ILS deal, while other London players look to take advantage of the new ILS regulatory and tax frameworks. Sidley also notes that the rise of technology could also impact the ILS space in 2018.

“Innovations in insurtech are likely to continue to impact the way that companies underwrite and cede risk and the way that reinsurers and ILS market participants evaluate, assume and manage risk and could potentially disrupt the (re)insurance and ILS markets,” warns Sidley.

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