S&P report stresses how ILS has changed the global market

Insurance-linked securitisation (ILS) has transformed the market, especially in the property catastrophe space, as it brings third-party capital into the reinsurance sector according to a new report from S&P Global Ratings.

The report, entitled “How Reinsurers Have Learned To Align Third-Party Capital With Their Needs”, claims that even the natural catastrophe losses of 2017 have not dented investors' enthusiasm for the various instruments that come under the banner of alternative or convergence capital. The report considers what effect the continued growth of ILS will have on reinsurers' competitive positions.

The latest figures show that ILS funds had combined assets under management of nearly $100 billion by July 2018. Even as the reinsurance industry digested the effects of 2017's three major hurricanes--Harvey, Irma, and Maria, which affected the Caribbean Islands, Texas, and Florida--alternative capital continued to grow, contrary to the expectations of some market observers.

According to S&P investors, scenting the chance of increased returns, replaced capital that had been put aside as collateral to cover insured losses, enabling them to participate in the January 1, 2018, round of renewals. As a result, the price hikes the industry has typically seen after previous catastrophe events were limited.

In a statement S&P said that: “Many observers had assumed that investors who entered the ILS market during the recent string of benign catastrophe years might take fright when investment returns turned negative. However, we saw no capital flight following the negative investment returns that followed the 2017 hurricanes as losses were within investors' expectations. Indeed, the market was able to more than restore the collateral trapped following the 2017 events.”