ILS set for growth in 2025

Confidence in the insurance-linked securities market is increasing after two years of strong returns, says Kathleen Faries. 

Kathleen Faries, Artex Capital Solutions chief executive officer and a veteran of the insurance-linked securities market, answers Bermuda Risk Review’s questions on the state of the sector and its outlook for the rest of this year.

How would you assess the state of the insurance-linked securities market in 2024? 

In 2024 the state of the market was more sustainable, with the investor base continuing to mature, expand and evolve.

Catastrophe bonds again appear to be driving growth in the overall industry. To what do you attribute that? 

The growth in the overall industry can be attributed to cat bonds offering good non-correlated returns with limited surprises. The Swiss Re Global Cat Bond Index posted gains of 17.3% in 2024 and 19.7% in 2023, rebounding sharply after a modest 2.2% decline in 2022. Investors remain cautious of the private market due to significant loss experiences over the past 10 years, but they are beginning to show renewed interest as rates and terms and conditions appear more sustainable and the prospects of long-term profitability are emerging.

Collateralised reinsurance capacity has also grown. Why is this an attractive segment? 

We are not surprised to see growth in the first quarter due to the significant wildfire losses in January 2025. These losses often result in insurance-linked securities (ILS) coming in via collateralised reinsurance to provide backup coverage. Additionally, we are observing some collateralised casualty activity, which has also contributed to the growth. Overall, the collateralised activity at Artex in January increased mid-single digits year-over-year.

On the other hand, industry loss warranty has been relatively flat. Why is that?   

We are seeing industry loss warranties (ILW) activity on the rise. This rise is typically correlated with the tightening of unlimited (UNL) traditional capacity. Given the early first-quarter wildfire losses, it would not be surprising to see an increase in ILW activity leading up to mid-year renewals as a hedge against further deterioration in underwriting results and volatility, especially if hurricane predictions indicate an active season. We anticipate there will be insurance-linked securities (ILS) players keeping some capacity available for this scenario. However, there will need to be a consensus on pricing, which doesn't always occur, as we know.

“The ILS market has become an extremely efficient way for the industry to access the wider capital market.”

Overall, there seems to be surplus capacity to meet demand which has driven down some rates. Is that cause for concern, or do rates have some room to drop without being unsustainable? 

Loss activity is stabilising rates for the most part. The message from investors continues to be a desire to be adequately compensated for the risk and volatility they are assuming. Given there is little movement on terms, conditions and attachments, the market can accept a slight downward movement on rates if, over the long term, investors and shareholders see that reinsurance can provide an acceptable return. Our industry does not have a great track record of maintaining this type of underwriting discipline, but hopefully, we will see a bit more stability in the next few years to instill investor confidence in the sector. 

Looking ahead, what do you see happening with ILS in 2025? 

Assuming we can maintain a favourable return environment and there is continued demand for more coverage, we are optimistic that the market will keep growing in a sustainable fashion. Artex has a healthy pipeline of new client business expected to commence in the second half of this year or early 2026. From what we are observing, all signs indicate that 2025 through 2026 will continue to be a good environment for growth in the sector. Additionally, we are seeing some interesting activity in the casualty space, with private credit investors considering the casualty line as a potential area for expansion.

The Los Angeles wildfires brought a substantial loss to the industry at a usually quiet time of year. What effect did it have on catastrophe bonds and the ILS market generally? 

The wildfire loss significantly accelerated catastrophe bond activity, according to our discussions with the structuring teams. Some sponsors are looking to enter the market earlier than they initially planned to ensure they secure access to available capital before the wind season. In the private ILS market for January 2025, post the losses related to the LA wildfires, the average performance return for our client funds was negative 7%. 

Are you concerned about the impact of a more than usually active hurricane season? 

There will certainly be heightened interest in this hurricane season's forecast and outcome, given that many catastrophe budgets are already impacted as we approach the wind season. If it turns out to be an active hurricane season, Artex will be ready to provide swift access to ILS capital, as always. The ability of the industry to access significant capital so efficiently through collateralised transformation and securitisation was not always the case. More than 30 years ago, Hurricane Andrew forced the industry to rethink how it could re-capitalise more quickly in the face of significant capital-impairing events. This year marks the 20th anniversary of one of those significant events – Hurricane Katrina in August 2005 – which caused damage in the range of $125 billion. Since these two major events, we have seen the ILS market become an extremely efficient way for the industry to access the wider capital market, now amounting to more than $100 billion, providing stability, growth and confidence in the sector.

There seems to be growth in other areas of the market, including casualty and cyber. Do you welcome this growth and what is causing it? 

We always welcome the expansion of the market. Artex endeavours to be able to support our clients’ risk appetite across multiple lines of business and structures. Growing with our clients is important to us, which is why we continue to invest in systems, tools, expanded services and especially talent.  

Where do you see ILS ending up as a proportion of the overall risk transfer market?   

Market dynamics and loss activity are very difficult to predict. However, I would say that ILS capacity is not going away, and that is a very positive development for the industry. We need access to capital to navigate through cycles, large events and an increasingly risky climate environment. It is hard to envision these dynamics changing in a way that would reduce the overall ILS capital in the market. It makes more sense that we will continue to see growth in the coming years, although its extent remains to be seen.

Do you believe Bermuda will continue to play a dominant role in the ILS market? What can it do to maintain its position? 

Bermuda possesses scale, experience, talent and a robust regulatory environment that includes Solvency II equivalence. Competing with this will require any jurisdiction to invest time and resources. This is not to say it isn't achievable, and clearly, the UK and Cayman Islands are on that path. Bermuda has been at the forefront of the ILS market for more than 20 years, with a significant market presence and a depth of knowledge at its core. There is no doubt that it will continue to contribute to the growth and expansion of the asset class in the years to come.

Kathleen Faries is chief executive officer of Artex Capital Solutions. She can be contacted at: kathleen_faries@artexrisk.com

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