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Structural breakthrough would benefit “stalled” ILS market, says Fitch


After years of impressive growth, the volume of available alternative reinsurance capital has “stagnated” and with little growth expected for the remainder of 2020 and into next year, a structural breakthrough might be needed, according to analysis by Fitch Ratings.

fitch-ratings-logoAt between $90 billion and $95 billion, the amount of capital supporting alternative reinsurance represents roughly 15-20% of total, available reinsurance capacity.

According to a new report from Fitch, after a “remarkable” increase of 14% CAGR from year-end 2012 to the end of December 2018, growth in the insurance-linked securities (ILS) marketplace has stalled somewhat.

“There are several explanations: significant catastrophe (cat) bond maturities, lack of new sponsors, investor retrenchment in collateralized reinsurance and adverse claim experience,” says the ratings agency.

As noted by Fitch and shown by the Artemis Deal Directory, there’s been a substantial level of cat bond maturities so far in 2020, with almost $2 billion more to come in the final months of the year.

However, issuance levels have been strong and it looks extremely likely that 2020 will be a record year for issuance of catastrophe bonds and related ILS. Although, it’s worth noting that mortgage ILS deals account for a significant portion of this year’s total issuance, which was also the case in 2018, the current record issuance year.

Alongside the need for a constant flow of new sponsors, Fitch highlights investor retrenchment and the adverse loss experience of recent years. The events of 2017 and 2018 resulted in some of the first losses for many in the ILS space, and combined with subsequent trapped capital issues, which have been significant for some, raised investor caution and ultimately saw some pull-back from the space and return to the sidelines.

As a result of theses factors, Fitch estimates “little growth for the rest of 2020 and into 2021.” Fitch continues to explain that in order for the third-party reinsurance capital space to regain its footing, “a structural break through is required to narrow the protection gap following a large catastrophe event.”

Additionally, consistent cat bond issuance from both new and old sponsors can sustain market growth, says Fitch. While wider acceptance in Europe and Asia would also serve to expand the breadth of the sector. In fact, Fitch estimates that a CAGR growth of 4-5% for the next decade would grow the market by $50 billion.

With the reinsurance industry expected to enter the January 1st, 2021 renewals in one of the hardest markets in years, it remains to be seen what influence this has on the cat bond market and broader ILS sector.

So far in 2020, and despite the impacts of the Covid-19 pandemic on financial markets, both new and repeat sponsors have featured. At the same time, Singapore and Hong Kong continue to develop their ILS capabilities, as does Lloyd’s of London, so it will be interesting to see how market dynamics unfold at 1/1 and beyond.

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