In a recent market analysis, AM Best’s report reveals that the insurance-linked securities (ILS) market is experiencing favourable conditions, resulting in advantageous terms and conditions for renewed and new programs.
This has led to a significant surge in yields for both ILS funds and catastrophe bonds. The report, titled “Cat Bonds Lift a Muted ILS Market,” is part of AM Best’s comprehensive assessment of the global reinsurance industry in preparation for the Rendez-Vous de Septembre in Monte Carlo.
AM Best is set to release other reports, including its annual ranking of the Top 50 global reinsurance groups, as well as in-depth examinations of the life/annuity, health, Lloyd’s, and regional reinsurance markets in the coming months.
The report highlights a remarkable milestone in catastrophe bond issuance, with the first half of 2023 witnessing a record-breaking figure of approximately USD 9.7 billion—already surpassing the total for the entire year of 2022.
Over the past five years, the cat bond market’s size has consistently expanded, remaining a beacon of success within the ILS sector.
This growth has contributed to an overall increase in ILS market capacity by an estimated USD 3 billion since the year’s commencement, reaching approximately USD 99 billion according to AM Best in collaboration with Guy Carpenter.
However, despite the promise of higher returns, the net capacity provided by the ILS market falls short of the USD 99 billion estimate due to a significant amount of trapped capital. Furthermore, capital formation within the market remains subdued, influenced by various factors.
Wai Tang, Senior Director of Insurance-Linked Securities at AM Best, explains, “The dearth of capital injections into the reinsurance market and the resulting supply shortfall has meant that many insurers were unable to fill their requested covers from reinsurers except at exorbitant prices during the year.”
Tang predicts that by year-end, the cat bond and collateralised reinsurance markets could witness pent-up demand for reinsurance cover from cedents who were constrained by budget limitations during the January or July 2023 renewal periods.
AM Best anticipates that the ILS market will continue to be challenging as long as heightened cedent demand for capacity coincides with relatively stable overall reinsurance capital levels.
Emmanuel Modu, Managing Director of ILS at AM Best, comments, “Whether higher returns posted by the ILS asset class begin to attract additional capital remains an open question.”
He notes that ILS investors may be focusing on other asset classes offering higher expected returns, greater liquidity, and potentially less volatility.
