According to analysts at AM Best, the global insurance-linked securities (ILS) market remains saddled with prior catastrophe losses, a decline in assets under management for some prominent ILS funds and a drop in the overall performance of ILS funds despite another year of a record catastrophe bond issuance.
The analysts noted that 2021 saw significant catastrophe loss experiences, while losses associated with secondary perils continued to receive increased attention from reinsurers and ILS managers due to their magnitude.
The substantial losses in recent years have made clear that rising rates are not enough to improve underwriting results for ILS managers and reinsurers.
These losses have also led to a diminution of available capacity, particularly for aggregate reinsurance and retrocession.
As a result for the January 2022 renewals, the ILS and reinsurance industries have focused negotiations on terms and conditions, restructuring coverage features such as adding per-event caps in aggregate covers and raising attachments and deductibles, AM Best says.
At the same time, issuance in the 144A catastrophe bond market in 2021 reached a record amount of approximately $12.5 billion, exceeding the previous annual record set in 2020 by almost $2 billion.
The poor performance of some ILS funds contrasts with the positive performance of cat bonds.
Emmanuel Modu, managing director, Insurance-Linked Securities, AM Best commented: “ILS fund managers are re-underwriting and de-risking their portfolios, as rate increases are no longer a panacea for improving underwriting results and satisfying skittish investors.”
According to the report, COVID-19-related claims reserves continue to level off and stabilise.
Coverage tightening and exclusions of communicable disease remained factors in January 2022 renewals, but price and attachment point increases have much greater influence.
Wai Tang, senior director, Insurance-Linked Securities, AM Best commented: “Despite the losses, the ILS market remains attractive to investors due to its low correlation with the broader capital markets, providing a valuable source of diversification.
“However, investors are understandably fatigued by the poor performance of some ILS sectors.”
