ILS slowdown in Q1 does not impact long-term appetite: Willis

07-05-2019

While the growth in the insurance-linked securities market continues to slow down in the first quarter of 2019, it does not reflect any long term change in appetite, according to Willis Re's ILS Market Update.

Following on from a reduction in the fourth quarter of 2018, just over $1.1 billion was raised through non-life catastrophe bond issues, compared with an average of $1.8 billion over the most recent six first quarters.

The report noted that recent cases of loss creep have tested actuarial models, and investors now more familiar with loss creep are likely to look closely at issuers’ records of timely and transparent loss reporting when making allocations.

Current modelling methods are being critically assessed given investors' need for regulation valuations, Willis added. It suggested more consistent valuation approaches may result in substantial growth in ILS capacity, as it could increase end-investors’ confidence in their evaluation of potential managers and support new allocations to the asset class.

"We don’t believe the slowdown in issues we saw in the final quarter of 2018 and again in Q1 reflects any long term change in appetite for ILS risk from the capital markets, but understandably some investors are looking harder at the mechanics," said William Dubinsky, managing director and head of ILS at Willis Towers Watson Securities.

"Data quality and accurate modelling are seen as essential and are under scrutiny, from the initial pricing throughout the life of a transaction. As ever, transparency is crucial, especially in post-loss reporting, which is becoming an important differentiator for cedants. Of course, transparency will still not eliminate reserve volatility, which is simply inherent to a business where every new event differs from its predecessors."

Dubinsky continued: “Enhanced understanding on all sides, including with cedants, has had a flow-through impact on collateral release arrangements, which are negotiated with a better awareness of the economically realistic potential outcomes. The industry has realised it needed to raise its game, and that effort is underway. Its success will be critical to maintain and restore long-term trust relationships between investors and cedants.”

In the first quarter, windstorm losses were the peril most commonly protected, with $450 million of capacity dedicated to pure US wind peril, and $550 million to peak multi-peril coverage.

Around $50 million of diversifying multi-peril protection was also issued, including a first: frequency protection against weather-related perils.

The quarter also featured the issue of a £75 million bond deducated to terrorism reinsurance, the first of its kind.

Willis Re, ILS, Bermuda, Global

Bermuda Re