Alternative capital in all different forms is clearly growing again, according to Willis Re Securities, whose latest ILS Market Update shows capacity reaching a near-record high of $27.3 billion.
Willis Re Securities, a division of re/insurance broker Willis Towers Watson (WTW), found that non-life insurance-linked securities (ILS) capacity issued and outstanding at the end of the third quarter this year was only exceeded by the year-end figure of $27.8 billion for 2018.
Analysts at the firm believe the ILS sector has reach a “dynamic equilibrium” and is well positioned for growth despite the losses and related loss creep of the past several years.
In particular, Willis Re Securities is anticipating growth in the more liquid forms of ILS through Q4 and into 2020, such as catastrophe bonds.
However, while many managers, sectors, and strategies have outperformed, others remain under stress, the report found. For example, capacity remains restricted for ultimate net loss (UNL) retrocession with only limited interest so far from new investors.
Meanwhile reduced loss creep, higher premiums, and the associated improved risk-return profile have provided a tailwind which should prompt new issues.
“The ILS market is at an important inflection point,” said William Dubinsky, Managing Director & CEO, Willis Securities, Inc. “Some investors are realigning their portfolios towards investments with lower projected losses, as they see increasing relative value at the more remote end. That could bode well for cat bonds.
“Sidecar interest has picked up as well, but the extent to which this interest will translate into completed deals will depend very much on the specific opportunities presented to investors,” he added. “Not all deals will meet their increasingly stringent criteria.”
Willis Re Securities believes that, going forward, ILS activity will be driven by a desire among market participants to discover and transfer new risks, as well as losing the protection gap and helping pensioners and retirees further diversify their investment risks.
There also appears to be a growing awareness that governments and related institutions can play an important part in facilitating risk transfer, analysts said, especially to ILS investors, where private markets fail to do so on their own.
Innovation and change in regulatory environments could also be a stimulating factor for the market, with jurisdictions such as Guernsey, the UK, and Bermuda fine-tuning their ILS rules and implementing new initiatives.
