ILS market put to test by record cat losses

11-03-2020

The insurance-linked securities (ILS) market has provided reinsurance capital of between $88 billion and $93 billion, according to new AM Best’s Commentary, titled Insurance-Linked Securities Market Looks to Future After Servicing Record Cat Losses.

The report said catastrophe events are putting the ILS market to a severe test as it seeks a path forward. The market experienced catastrophe losses exceeding $220 billion from July 2017 through December 2018, the first time losses reached that threshold in an 18-month span.

The only other period the ILS market faced high catastrophe losses was in 2011 (after the Japan and New Zealand earthquakes, US hurricanes/windstorms and Thailand floods), when this market was still in its nascent stage of development.

The report outlines several broad themes that have crystallised in recent years, such as: investors have been surprised by the magnitude of losses and the uncertainty around the loss figures for some of the catastrophe events; there is a need for more standardised investor reporting; the rights of investors and cedants are more in focus than before; and the ILS market is devising new fronting solutions for facing cedants and mitigating trapped capital.

“Of late, ILS investment managers have focused on a new way to access the reinsurance market through fronting reinsurers that are either owned by the ILS funds or have been set up and/or managed by such funds,” said Emmanuel Modu, managing director, AM Best Rating Services. “This is a solution some funds have actually implemented and others are contemplating.”

Insurance linked securities, ILS, AM Best, Catastrophe

Bermuda Re