Next stage of ILS growth requires international and peril diversification: Howden Re

The insurance-linked securities (ILS) market remains in a strong position, but expanding into international markets and less conventional perils will be critical for the market’s next stage of growth, according to executives at reinsurance broker Howden Re, who note that this expansion is vital both to unlock diversification benefits and to help close global protection gaps.

These insights were shared by Nena Atkinson, Associate Director of Strategic Advisory and Research, and David Flandro, Head of Industry Analysis and Strategic Advisory, at BNP Paribas Asset Management’s third annual ILS Seminar in Zurich.

The presentation primarily focused on the forces shaping the reinsurance market during the mid-year renewals and how the ILS sector integrates into it.

Addressing alternative capital and ILS, Atkinson highlighted how catastrophe bond issuance hit a new record in 2025, with new issuance surging roughly 45% higher than in 2024.

“Alternative capital is now clearly structural, with nearly 25% of total dedicated reinsurance capital coming from alternative sources. The fact that growth has continued even as pricing has begun to moderate shows how embedded the market has become in cedents’ programme structures,” Atkinson said.

While Atkinson emphasised that ILS remains attractive to investors due to its relative lack of correlation with broader financial markets, she warned that moderating prices will put pressure on margins

“This places greater emphasis on disciplined risk selection, portfolio construction and diversification to help sustain returns throughout the softer part of the cycle,” she explained.

Looking ahead, Atkinson cautioned that while the ILS market is in a strong position, the market’s next stage will depend heavily on disciplined capacity deployment, noting that the sector remains heavily concentrated around familiar risks, particularly US property-catastrophe.

“Investors must continue to be selective. Much of the market remains concentrated around familiar catastrophe risks, particularly US property-catastrophe. Over time, greater expansion into international markets and less conventional perils will be important, both for the diversification benefits this offers and for the role ILS play in helping to close protection gaps,” Atkinson explained.

Adding: “The opportunity is to direct current appetite towards established peak risks where pricing remains adequate, and where there is a need, while broadening into areas where ILS add genuine value.”

Meanwhile, Flandro outlined how the reinsurance market is softening against a complex risk backdrop, and how alternative capital has ultimately become an important avenue of the overall capital base.

“Dedicated reinsurance capital reached an estimated record US$505 billion at year-end 2025; reinsurer profitability has been strong in accounting terms and alternative capital has become an increasingly important part of the overall capital base,” he explained.

“On the other hand, this is not a benign risk environment. Geopolitical volatility, inflation, higher interest rates, casualty reserve pressure, cyber aggregation, secondary perils and private-credit stress are all headwinds.”

Flandro continued: “That is the apparent paradox at the heart of the market today: risk premia remain elevated, yet insurance and reinsurance pricing are easing in most areas. As price declines and competition for growth intensify, the difference between disciplined underwriting and undisciplined growth becomes increasingly important.”

Nevertheless, if capital continues to remain abundant, Flandro observed that pricing is softening from a recent high, which presents a different scenario compared to a market experiencing a structural decline.

“The current moderation is partly a function of the speed with which capital has returned to the sector following a very profitable period for reinsurers. The 1 January 2023 hardening was significant in both price increases and decreases in assumed exposure; underwriting experience in the subsequent years was unusually strong,” Flandro commented.

He continued: “This has drawn both traditional and alternative capacity back into the market, culminating in a record year for gross ILS issuance in 2025. Concurrently, a diversified reinsurer holding a bond portfolio of around three years’ duration will have seen reference yields fall by roughly 100-150 basis points, depending on average rating, since their late-2023 peak.”

On the other hand, Flandro indicated that decreasing yields enhance the mark-to-market value of investments, thereby supporting reported book capital throughout a sector whose portfolios generally exhibit this characteristic.

According to the executive, these combined factors have shifted a market that was recently characterised by excess demand to one now marked by excess supply, on average.

“But returns are now compressing. Although the sector’s equity spread remains elevated, this on its own it is an insufficient measure of economic profit. Our economic value-added analysis shows value creation is broadly neutral, on average, at current price levels. Further rate reductions would place greater weight on risk selection and portfolio construction,” Flandro concluded.