The insurance-linked securities (ILS) market decreased in size in the second quarter of 2019 partly because loss creep from prior year catastrophe events has dented investor confidence.
The market declined year-on-year in the second quarter of 2019, making it the second-lowest Q2 for issuance by volume in the past eight years, except for 2016.
According to the new ILS Market Update from Willis Re Securities, the reinsurance division of Willis Towers Watson, the quarter saw just below $1.7 billion of non-life ILS capacity issued through 11 cat bonds, down from $6.2 billion and $4 billion in Q2 2017 and 2018, respectively. The number of transactions declined less than total transaction value.
The quarter saw a continuation of the underlying theme observed in Q1, with US wind focused deals dominating the Q2 issuance, including $650 million of pure coverage for the peril issued across three cat bonds, and $1.04 billion for peak multiperil protection.
According to the report, loss creep from prior year catastrophe events continued to affect the ILS market but at a "substantially reduced rate". Willis said much of the market has recalibrated models and thinking to accommodate loss creep, and is closely watching the commencing wind season to set the tone for the year ahead.
At the end of Q2 2018, the cat bond market was facing losses of an estimated $755 million, roughly 3 percent of non-life cat bond capacity outstanding before hurricane Harvey. Now, a year later, that loss has has reached slightly more than $1 billion.
Willis noted that in the first half of 2019, relationships added real value to cedants. In many cases, programmes got done at 4/1, 6/1 and 7/1 without the same level of ILS participation as in the past. While cedants who had few relationships, all single-year capacity and too high a component of purely transactional capacity tended to suffer a little.
The report concluded that while things are slowly returning to a more normal environment on the ILS side, relationships will still matter a great deal in H2 2019 in cedants getting the protection they need.
William Dubinsky, managing director & head of ILS at Willis Re Securities, said: “Things are slowly returning to a more normal ILS environment, but relationships will still matter over the next six months if cedants are to get the protection they need at sensible pricing, terms, and conditions.
"The contracting ILS market required cedants to look elsewhere for capacity during the recent renewals. Those with at least some relationship-based treaties with long-established reinsurance partners on their books found it easier to plug the gaps, relative to those who buy reinsurance on a purely transactional basis. That is likely to be the case for the balance of the year at least. Both approaches have merits, however, and the ideal balance will be different for each reinsurance buyer.”
Willis Re Securities, ILS, Catatstrophe, Results 2019, Bermuda