Issuance of non-life property catastrophe insurance linked securities (ILS) smashed previous records by 30% at $6.3 billion in Q2, according to Willis Towers Watson Securities latest ILS Market Update, which heralded a positive “tipping point” from which ILS will grow into a larger share of global peak cat risk and the wider re/insurance market.
Willis said the second quarter of 2017 saw $6.3 billion of non-life catastrophe bond capacity issued through 36 tranches.
This figure far surpassed the previous $4.5 billion record in 2014 and is up by about 85% from the same period last year, where these figures were at just $1 billion issued through 17 tranches.
Bill Dubinsky, Head of ILS at Willis Towers Watson Securities, said the market has possibly never been in such “robust health,” with “record breaking issuance and competition continuing to increase amongst ILS fund managers.
“I believe this will create the conditions for significant innovation and development so that the benefits of the ILS product extend beyond peak property cat, where it may already be the preferred choice, and out across the wider insurance industry,” Dubinsky added.
Two of the largest ever catastrophe bond transactions, Kilimanjaro II Re 2017-1 and Ursa Re 2017-1, were finalised in Q2, driving the record level issuance.
Both series provided cover on an industry loss and annual aggregate basis against U.S., Canada and Puerto Rico named storms and earthquakes.
At quarter ends bonds provided $24.7 billion outstanding, up 16.5% year-on-year, Willis said.
This outstanding growth for the non-life property catastrophe ILS sector comes despite a soft reinsurance market, where reinsurers are being squeezed with reduced equity returns and government yields in Europe and Japan remaining negative.
Broker Willis believes the outstanding ILS market growth of the 2017 second quarter marks the beginning of a new re/insurance era, where ILS takes over a greater market share to become the largest manager of peak cat risk and then innovates to spread further into non-peak cat and property, casualty, life and health.
“Of course, the penetration is far from complete. ILS still has a long way to go both to make a difference in property catastrophe (cat) in the middle market in peak zones as well as to have substantial impact in nonpeak zones.
“Further, areas beyond property cat see some limited influence from ILS, but by no means is ILS in the driver’s seat.
“Even in property cat it is possible that certain types of cat events will create differentiation among underwriters, traditional, ILS and otherwise, potentially shifting the balance. Still, it seems perhaps more likely that this does represent a critical juncture.
“We very well may look back and see Q2 2017 as the death knell of the traditional property cat reinsurance model. As we have suggested as recently as last quarter, many reinsurers have and will successfully partner with ILS capital as well as technology to benefit their customers and shareholders, now that standing still seems fruitless,” Willis explained.
For reinsurers who have been struggling to turnover any sort of significant organic growth in the current market environment, the success of the non-life ILS market will further challenge the stability of their position on the market’s value chain.
One of the consequences of reinsurers seeking to offset the ILS competition apparent this year, is a trend to move away from offering capacity to cover the traditional and largest risks, that are increasingly being taken over by the ILS space, and innovate to find pockets of growth in the less competitive niche market areas.
