Strong ILS demand and continued growth expected at year-end and in 2027: Pennay, Aon

The insurance-linked securities (ILS) market will see strong demand through the end of 2026 and into 2027, while the asset class is also likely to grow further with catastrophe bonds and sidecars key areas as cedents integrate ILS products into their reinsurance, according to Richard Pennay, CEO of Aon Securities.

Speaking during a pre-Monte Carlo Rendez-vous briefing by Aon’s Reinsurance Solutions executives, Pennay explained that he has never seen the insurance-linked securities (ILS) market better positioned than it is today.

“The ILS market today is truly at its strongest stance that it has ever been over the 20 plus year evolution of this market,” Pennay explained, “We certainly have the sense that that this market is at its strongest point today.

“The ILS capital market comprises of $145 billion dollars of capacity, and it really is a story of growth.

“The market has grown in the last 10 years at about 6.5% annually, and in the last three years, it’s been growing at about 13.5% annually. So these are strong growth numbers, and those capital numbers are growing at a rate that is effectively twice the rate of reinsurance balance sheet capital.”

He went on to say that this growth in the ILS market also shows that “it takes two to tango,” meaning the cedent and investor sides.

Facilitating these reinsurance partnership’s, Pennay said that Aon works with its clients to “ultimately form a view as to how ILS can complement those structures.”

Pennay continued to explain, “In addition to that demand from our clients, we are seeing an overwhelming supply of capacity from the insurance-linked securities investors.

“That momentum and the supply of capital is really coming off the back of a couple of things.

“One, that ILS has been illustrating its diversification merits over a 20 plus year period, and secondly the absolute return that investors have been producing in recent years have been strong. That is just creating a further narrative to the benefits of ILS in the broader context of investment strategies.”

Moving forward, Pennay said that he expects the focus of the ILS market and protection buyers to remain on two of its key growth areas.

Pennay said, “One is the cat bond market. The cat bond market today has issued $18 billion worth of catastrophe bonds year to date, and we do anticipate further growth in that market.”

Adding that, “In pockets of the U.S. we are seeing that some of our Aon clients are purchasing in excess of 25% of their overall reinsurance purchase in catastrophe bond form,” which really helps to drive home the importance of the cat bond product in reinsurance towers today.

Pennay also expects ongoing demand in the sidecar market.

He explained, “Sidecars have been around since the ILS market’s inception. They have predominantly been property based, but in the last 18 or 24 months, we have seen a true expansion of sidecars into either whole-account sidecar structures or casualty-based structures, and some of these transactions are garnering a great deal of attention from some of the world’s largest investors.

“We continue to see potential for that market to really grow as we move forward.”

Because of these ILS market dynamics and the expected persistence of forward-momentum, Pennay anticipates market growth will continue.

“Where we’re at at this point, is that there will be strong demand as we go into year-end and further into 2027, and clients will be focused on one very specific aspect of this,” Penna said. “Which is, clients have the ability to lock in multi-year capacity at what will evidently be relatively attractive pricing relative to prior years.”

Also read: Reinsurance capital grows, ILS investor base broadens = more savings to come for clients: Aon.