Re/insurance broker Willis Towers Watson (WTW) has suggested that it may now be “essentially untenable” for property catastrophe reinsurers to rely solely on equity without some access to alternative capital, as the insurance-linked securities (ILS) market sees a surge in activity over 2018.
WTW’s Q2 ILS Market Update report observed that cat bond issuance is at or near record levels, while non-life assets under management (AUM) also continue to grow steadily.
It attributed the market’s continued success to the lower cost risk transfer options that ILS offers ceding insurers and reinsurers, as well as the portfolio diversification benefits it offers end investors who want to increase their allocations.
However, WTW also noted that some research analysts have claimed that the lack of price increases following 2017’s catastrophe losses means ILS capital has become indispensable to property cat reinsurers, who are now racing to create even more ILS partnerships in order to stay competitive.
Additionally, WTW identified insurance as a potential growth area for ILS, with investors recognising its potential as they try to grow AUM, particularly if they can manage some risks beyond nat cat.
The report also found continued structural innovation in how risk is converted to investible form, as well as ongoing efforts to offer more risks and ILS structures to reflect the diversity of investors and risk transfer needs.
This can be seen in the continued growth in ILS backing quota share type arrangements on a semi-permanent basis, where sources of risk range from insurance portfolios to reinsurance portfolios, to facilities arranged by intermediaries for the benefit of their customers.
While purely tactical sidecars have not disappeared entirely, they have played a minimal role in proving capacity following the 2017, and new relationships with ILS tend to complement rather than fully replace the relationships protection buyers have held with re/insurers, WTW said.
The broker further noted that ILS has the potential to expand beyond nat cat risk in future, which it expects to help make a wide range of insurance more available and affordable, and which will have a significant effect on efforts to narrow the global protection gap.
