Beyond the cat comfort zone
The insurance-linked securities (ILS) market has spent years proving what it can do with catastrophe risk. Today that foundation looks stronger than ever. Catastrophe bonds are attracting robust investor demand, issuance has reached new highs and alternative capital is firmly embedded in the global reinsurance market.
For Kathleen Faries, CEO of Artex Capital Solutions, that success opens the door to something bigger.
“What’s been most interesting to watch is how ILS has moved from a narrow property catastrophe-focused market into a much broader risk transfer tool. That doesn’t mean property cat is any less important, it remains the foundation, but investors are much more comfortable today with the idea that insurance risk can be accessed in different ways and across a wider range of exposures,” she told Bermuda:Re+ILS.
The question is how far that expansion can go without weakening the qualities that helped ILS establish itself in the first place. “The next phase of growth will be defined by how well the market can keep expanding into specialty, casualty and other non-cat areas while maintaining the discipline, transparency and investor confidence that have made ILS successful.”
These key attributes will prove particularly important as the reinsurance cycle begins to soften. New capital creates opportunities to broaden the market, but Faries is clear that expansion cannot become an end in itself. “Growth needs to be sustainable growth, not innovation for innovation’s sake.”
A foundation for something bigger
Cat bonds are clear evidence of how far ILS has come. Once viewed as an alternative corner of reinsurance, the market has developed the scale and infrastructure to become a recognised source of protection.
Faries attributes that progress to valued characteristics: “Cat bonds have become mainstream because they offer investors something very important: transparency, liquidity, scale and a well-understood way to access re/insurance risk.”
That maturity is now creating possibilities beyond the product’s traditional boundaries. As examples, Faries pointed to innovation through segregated or protected cell vehicles issuing bonds, including London Bridge 2 in London and Arthur Re in Bermuda, which can reduce issuance costs and broaden sponsor interest. “Cat bonds are not just a product any more; they are a foundation for broader ILS growth globally,” she said.
But the experience of property cat also provides a warning about how that growth should happen. Faries noted that it was not long ago that investors were demanding greater certainty over the risks they were assuming. The property cat market responded by concentrating on clearly defined terms and conditions and shifting attachments as investors sought a route towards longer-term profitability.
Those lessons become particularly relevant if competitive pressure increases. “These fundamentals will remain important as the market starts to move towards a soft cycle,” she said.
ILS’s branch-out success will hinge on finding risks that can be understood, priced and remain committed to through changing market conditions.
The casualty opportunity
Nowhere is that challenge clearer than casualty. It is arguably the most discussed potential growth area for ILS, but it asks investors to move well beyond the relatively short-duration risk that has characterised much of the asset class.
“Casualty is a significant opportunity because cedants need solutions and investors are looking for new ways to access longer-duration insurance risk alongside assets they can manage,” Faries said.
Investors interested in casualty are not necessarily identical to the investors that built the traditional ILS market. Faries pointed to private credit investors as an example.
“Private credit investors are interested in casualty because it has some of the same characteristics as other investments they may consider, and because they have the skills to analyse the underlying performance, particularly on the asset side of the trade. This differs from the approach to analysing shorter-duration ILS investments that are non-correlating and have been the mainstay of ILS up to this point,” Faries explained.
That convergence could bring meaningful new capital into reinsurance. Meanwhile, re/insurers are seeking alternative sources of capital to complement their balance sheets for risks that can be uncertain and take years to develop.
While seemingly a perfect match, those same characteristics make casualty a far more complicated proposition: “The duration is longer, and claims develop over many years, which creates reserve uncertainty related to social inflation, the legal environment and market risk.”
Scaling casualty ILS therefore requires more than adapting a property cat structure to a different peril.
A different kind of commitment
For Faries, one of the central questions is whether structures can satisfy both sides of the transaction over a far longer horizon. “The opportunity is to create structures that bring meaningful external capital to casualty markets. The challenge is making sure those structures give cedants the protection they need while giving investors enough clarity, alignment and confidence in how the risk will perform.”
That places greater importance on the parties behind a transaction as well as its economics. “Cedants also need to carefully consider who they are partnering with both to manage the transaction and provide the capital. For these longer-duration transactions, often between seven and 10 years, there needs to be increased scrutiny on the parties and their collective longevity and commitment to the asset class,” Faries said.
The implications extend into data, reserving and claims, and Faries was clear on how the market can make that happen. “Before casualty ILS can scale in the same way property cat has, the market has to build more confidence around how these longer-tail risks behave and are reserved for over time. That means better standardised data quality, stronger real-time analytics and structures that are very clear about the duration of the trade, asset management, claims development and alignment between cedants and investors.
“It will not happen overnight. Investor comfort will need to build over time, and the market will have to demonstrate that casualty risk can be transferred in a disciplined, transparent and economically attractive way.”
Responsible innovation
The arrival of new investors should accelerate that development. Faries expects additional capital to encourage both innovation and standardisation as structures evolve to accommodate different risk and return objectives.
But more doesn’t automatically equal better: “The risk is that the market moves too quickly into new areas without enough underwriting discipline, analytics, claims expertise, data clarity or investor understanding behind it.”
It is a warning that becomes more pertinent as competition increases. The hard market gave ILS investors an opportunity to insist on stronger terms and economics. A softer environment might test how firmly those lessons have become embedded.
“The best outcomes will come from innovation that is thoughtful, well-structured and grounded in a clear understanding of the underlying risk and long-term commitment required from all parties,” Faries said.
The opportunity ahead is therefore considerably broader than simply putting more capital behind more insurance risk. ILS is pushing beyond the territory in which it first proved itself. The task now is to carry the principles built there into much less familiar territory. As Faries puts it, innovation has a place, but “it has to be responsible”.
For an asset class looking beyond its cat comfort zone, that distinction might determine how far the next phase of growth can ultimately go.
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Kathleen Faries is CEO of Artex Capital Solutions. To find out more about Artex Capital Solutions, www.artexrisk.com.
Read the full Bermuda:Re+ILS Annual 2026 here.
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