Growth in the insurance-linked securities (ILS) market continued to slow in the first quarter of 2019, with $1.1 billion raised through non-life catastrophe bond issues, according to Willis Re, the reinsurance arm of broker Willis Towers Watson.
Analysts noted that issuance was well below the average of $1.8 billion raised during the first quarter of the previous six years, and was only around one-third of the record breaking activity seen in Q1 2018.
Windstorm losses were the peril most commonly protected, according to Willis Re’s data, with $450 million of capacity dedicated to pure U.S wind peril, and $550 million to peak multi-peril coverage.
An additionally $50 million of diversifying multi-peril protection was issued, as well as a £75 million bond issued by Pool Re, which was the first ever dedicated to terrorism reinsurance.
Willis Re also found that the weighted average last-12-month risk premium for non-U.S wind-exposed bonds jumped 2.2 points to 6.5% in Q1 2019, while for U.S wind-exposed instruments it rose 0.3 points to 6.1%.
Analysts acknowledged that loss creep has been a significant issue for investors recently, who will likely look closely at issuers’ record of timely and transparent loss reporting when making allocations in future.
They added that more consistent valuation approaches may spur substantial growth in ILS capacity, as it would increase end-investors’ confidence in their evaluation of potential managers and support new allocations to the asset class.
“We don’t believe the slowdown in issues we saw in the final quarter of 2018 and again in Q1 reflects any long term change in appetite for ILS risk from the capital markets, but understandably some investors are looking harder at the mechanics,” said William Dubinsky, Managing Director & Head of ILS at Willis Towers Watson Securities.
“Data quality and accurate modelling are seen as essential and are under scrutiny, from the initial pricing throughout the life of a transaction,” he explained.
“As ever, transparency is crucial, especially in post-loss reporting, which is becoming an important differentiator for cedants. Of course, transparency will still not eliminate reserve volatility, which is simply inherent to a business where every new event differs from its predecessors.”
Dubinsky continued: “Enhanced understanding on all sides, including with cedants, has had a flow-through impact on collateral release arrangements, which are negotiated with a better awareness of the economically realistic potential outcomes.
“The industry has realized it needed to raise its game, and that effort is under way. Its success will be critical to maintain and restore long-term trust relationships between investors and cedants.”
