Analysts at AM Best have warned that the insurance-linked securities (ILS) market finds itself “at a crossroads” following several years of heightened catastrophe losses, and with the supply of capital set to remain low while investors re-assess the class.
The rating agency notes that losses stemming from Hurricane Ian, after years of elevated losses, have solidified the arrival of a hard market and dampened the influx of new capital from ILS investors.
In addition to Ian, major events including European windstorms, Australian floods, severe convective storms in France and Winter Storm Elliott have further affected the confidence of investors.
And, at the same time, smaller catastrophe events have proved able to have as much potential as large events to impact ILS transactions by eroding retentions on aggregate deals.
Reflecting on the state of the ILS market amid these challenges, AM Best notes that some investors are holding steady in this asset class.
However, it also acknowledges that sentiment among some ILS managers is that the supply of capital, particularly for aggregate reinsurance and retrocession, will remain tepid for some time despite high demand given the losses, along with inflation and lower asset valuations.
“ILS managers have significantly diminished their appetite for aggregate covers that reinsure the accumulation of multiple loss events,” said Emmanuel Modu, Managing Director for ILS at AM Best.
“In some instances, they are structuring deals to exclude secondary perils that generate small and medium-sized losses,” Modu added. “This shift is causing more of these risks to remain on primary insurers’ balance sheets.”
AM Best argues that ILS managers and traditional reinsurers have accepted that raising rates alone cannot improve underwriting outcome, which has led the market to accelerate its efforts to push for better terms at renewal in addition to higher prices, including on features such as per-event caps in aggregate covers and higher attachment points.
“Market participants, including the ILS managers AM Best interviewed, routinely cited that the overall average risk-adjusted rate increase was approximately 50% in the United States and about 30% to 40% in Europe,” said Wai Tang, Senior Director for ILS at AM Best.
“Unlike the prior year, price increases for loss-affected and non-loss-affected areas were substantive, with smaller but surprising spikes for non-loss-affected areas,” Tang explained. “This speaks to the fact that capital supply is indeed an issue for the reinsurance market.”
AM Best did highlight that the catastrophe bond market remains one of the more promising areas in the ILS market, with higher risk-adjusted multiples.
However, also noted that issuance in the 144A cat bond market came to approximately $9.4 billion, down from a record $12.5 billion in 2021, while issuance volume in H2 reflected the capacity shortage following Hurricane Ian, when issuance volume constituted only 15% of the total 2022 annual amount.
