Could ILS become a victim of its own success?

The growing acceptance of insurance-linked securities (ILS) as a strategic institutional investment could accelerate the reinsurance market’s softening cycle, as increasing volumes of capital compete for opportunities in a relatively small sector.

That was the warning from Michael Hamer, partner and senior analyst at Albourne Partners, speaking on a panel discussion at ILS Bermuda Convergence 2026, held October 12-14, which examined the implications of growing capital supply for pricing and underwriting discipline. The session also included Liz Breeze, head of Hiscox Capital Partners; Lixin Zeng, managing partner of Integral ILS; and moderator Dominik Hagedorn, co-founder of Tangency Capital.

Hamer estimated that third-party capital in the sector stands at approximately 140-150 billion, a relatively modest amount compared with the wider institutional investment universe.

Hamer explained that the reinsurance cycle is fundamentally driven by the balance between available capital and demand for protection, with that balance determining the negotiating power of buyers and sellers.

“If the providers of cover have the upper hand, that’s in short supply, they’re going to increase the price and improve the terms and conditions,” he said.

Conversely, when capital is abundant, buyers gain negotiating power, enabling them to secure lower prices and potentially weaker terms and conditions.

“There’s also a growing perception that [ILS] should be a strategic asset allocation in its own right,” he said.

“But if you have that across the investing universe, you’re going to get so much capital trying to get into the industry that it’s going to continue to push the cycle down.”

The experience of 2017 offers a cautionary precedent. Despite substantial catastrophe losses from three major hurricanes, the anticipated improvement in reinsurance pricing largely failed to materialise as fresh capital entered the market.

“I think the lesson that we learned from 2017 was that a number of entities raised capital to invest but didn't actually have a well thought through plan of how it should be invested. So, there was excess capital in the negotiations, which led to a decline in price,” Hamer said.

The question now is whether managers have learned to resist the temptation to deploy capital simply because it is available.

Hagedorn suggested that managers should not accept capital without a clear strategy for putting it to work.

 Breeze emphasised that underwriting economics must ultimately determine whether additional capital can be deployed: “I think you need to be focused on the underwriting initially, and are you getting paid enough money for the risk that you’re taking. Just because the capital is there doesn’t mean it should be creating that opportunity.”

Breeze also highlighted the importance of protecting attachment points and terms and conditions as pricing weakens, particularly as pressure builds to move further down reinsurance programmes in search of returns.

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