Lines are blurring in the insurance-linked securities (ILS) market as matching the right product structure and capital to a ceding companies needs becomes ever more important, but as the market continues to grow Willis Towers Watson Securities (WTWS) notes that transparency remains key.
According to WTWS’ data on the non-life ILS market, 2018 was another year of growth as overall ILS or alternative reinsurance capital grew by 6% from $88 billion to end the year at $93 billion, despite an evident slowdown in Q4.
WTWS said that non-life cat bond issuance activity remained brisk in 2018, despite the pressure from larger catastrophe losses of 2017 and multiple smaller catastrophes in 2018 itself.
The brokers capital markets unit counted $9.2 billion of new non-life cat bond issuance during the period, the second most active year WTWS has observed.
The main trend highlighted in the latest ILS market report from WTWS is the blurring of lines within ILS itself, as the range of structures that support collateralised reinsurance and retrocession transactions expands.
Ceding companies are helping to drive this, as well as market growth, as they look to identify the best ILS structures to use as risk transfer tools.
“Lines of demarcation within the ILS space are blurring,” WTWS explained, saying that new tools continue to be developed and existing structures are continually refined.
The broker suggests that the “blurring of categories” within the ILS market may help in overcoming challenges to do with loss reporting, reserving accuracy, collateral release and rollover, and the increased volatility seen within the ILS asset class over the last two years.
It should here be noted that it’s not unusual to hear from a broker promoting expansion of the boundaries and terms of ILS structures, but it is important that the investor base is aligned with this.
While this expansion and blurring of ILS market lines continues, WTWS says that “two-way transparency both for ceding companies and investors is key,” adding that the firm believes some solutions to problems the ILS market faces “seem close at hand.”
The case of Atmos Re, which halved in size and saw its pricing raised on investor feedback, is a good example of this.
“We are seeing the convergence of convergence,” explained William Dubinsky, Managing Director & Head of ILS at Willis Towers Watson Securities. “The overall ILS figure is today a much more meaningful measurement of market size than focusing on cat bond and sidecar issuance alone. ILS capacity and products are growing organically and dynamically as gaps between different products and subsectors fill in, and innovation and market necessity create new capacity and products.
“Our confidence in the speed that new solutions will emerge gives us a favorable outlook for ILS in 2019.”