Reinsurers to use more ILS capital as catastrophe losses rise: S&P


With rising catastrophe losses impacting insurance and reinsurance markets, S&P Global Ratings believes that use of insurance-linked securities (ILS) is going to increase.

sp-global-ratings-logoIn a new report the rating agency explained that it believes access to third-party capital will become increasingly important as a source of reinsurance and retrocession.

Reinsurers are already using more ILS capital and instruments such as catastrophe bonds to support their growing need for retrocession and catastrophe loss experience in 2021 so far may trigger further increases in this activity.

As we’ve also explained recently, rating agencies own view on re/insurers catastrophe risk charges and capital loadings could also play a role here, over time, especially as climate change related risks are factored into their thinking.

S&P Global Ratings credit analyst Maren Josefs explained that, on reinsurers, “In 2021, they ceded about 50% of their exposures at a 1-in-250 return period through collateralized instruments, such as insurance-linked securities (ILS).”

S&P highlights that around 15% of global reinsurance capital is sources from the capital markets, through ILS structures such as funds, catastrophe bonds and collateralized reinsurance vehicles.

This share is increasingly significant in the retrocession market, the rating agency believes.

Leading S&P to say, “We expect ILS to increase its market share over the next few years as innovative new issuances address new risks, such as cyber, climate change, and environmental, social and governance (ESG).”

“The more peak exposures the reinsurance market transfers to a broad range of ILS investors, the better for the stability of the system and the growth of the market,” Josefs said.

S&P also noted that 2021 remains uncertain for the ILS and reinsurance market, with returns set to be dented by catastrophe loss activity and losses likely to exceed reinsurers’ catastrophe budgets again.

But, “Despite these setbacks, we expect investor interest in the ILS asset class to remain strong, as long as the market stays disciplined. We therefore expect the ongoing flight to good quality ILS asset managers to continue,” Josefs explained.

As we explained yesterday, respondents to our latest global reinsurance market survey said they expect demand for reinsurance to increase and many anticipate using more ILS capacity in 2022.

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