Resilient in times of crisis

The ILS sector is well-positioned to enable investors to take advantage of the hard market in catastrophe reinsurance, write ILS Bermuda chair Jo Stanton and ILS Bermuda member Anna Pereira.

It has been an interesting year for the insurance-linked securities (ILS) market. Losses to reinsurers have exceeded the 20-year average in each of the last six years, with relevant rebuild cost inflation and more catastrophe activity resulting in higher claims payments for reinsurance companies.

Meanwhile, the reinsurer capital base has shrunk by about 20 percent in the last year, driven by broader market volatility and loss activity, particularly from Hurricane Ian. The resulting market dislocation has resulted in global reinsurance market premium rate spikes similar only to those that occurred after 9/11 2001 and Hurricane Katrina in 2005.

The ILS market has once again proved resilient in times of crisis and well-positioned to enable investors to take advantage of the dislocated market. Despite caution among allocators, investors continue to be attracted by the features that have established ILS as a highly desirable asset class, in particular its low correlation to the broader financial markets, with fund flows particularly to the liquid part of the market. There continues to be a capital shortage and an opportunity for investors to harvest the most pronounced risk-adjusted returns across aggressive as well as defensive ILS strategies.

“We are starting to see ILS leveraging digital issuance to grow the investor market and increase liquidity.” Jo Stanton, ILS Bermuda

Bermuda is uniquely positioned with a long history as a well-regarded centre of excellence for innovation in risk transfer. Market disruptors create opportunity and new partnerships, and this is an excellent time for Bermuda to do what we do best: act as the incubator for developing and implementing new and emerging strategies, capable of adapting tried and tested solutions with emerging risk and technology, incorporating artificial intelligence, data mining, automation and blockchain solutions.

Broadening of the ILS market can be seen in the expansion beyond natural catastrophes, which have historically been the primary focus, with growing interest in other types of non-correlated specialty risks, and further developments in cyber and terrorism. As the world becomes more interconnected and geopolitical risks increase, we expect the demand for these types of ILS to grow.

Bermuda’s regulatory framework has created opportunities to develop and leverage the progressive commercial and regulatory approach already adopted in respect of digital assets and fintech. We are starting to see ILS leveraging digital issuance to grow the investor market and increase liquidity. Bermuda is in a position to lead in this space given our existing Digital Asset Business Act 2018 (DABA) legislation and regulatory framework which is constantly being refined in response to developments in this area.

It is clear that Bermuda is the global leader in the ILS market. Focusing on listed ILS, in 2010, the total value of ILS listed on the Bermuda Stock Exchange (BSX) was $1.7 billion. With the outstanding catastrophe bond market size at $41.9 billion at the end of 2022, the BSX is by far the world’s leading exchange for ILS, including listings from other jurisdictions, with $33.88 billion in market cap outstanding, representing almost 90 percent of global issuance.

Future challenges and opportunities

ILS is acknowledged as an efficient capital base to solve some of the biggest and most challenging risks and provides the opportunity to narrow the amount of uninsured or underinsured risks throughout the globe which the industry has coined the “protection gap”.

A March 2023 report by the Global Federation of Insurance Associations (GFIA) identified and quantified the most significant and growing annual global protection gaps: $1 trillion for pensions; $0.9 trillion for cyber; $0.8 trillion for health and $0.1 trillion for natural catastrophes. Addressing uninsured and underinsured risks will help to build resilience for emerging and developed countries and corporate entities and drive a sustainable impact.

There is increasing interest from jurisdictions around the world to use alternative reinsurance solutions such as ILS to help close the protection gap and provide recovery and resilience to communities. Greater emphasis on environmental, social, and corporate governance (ESG) factors are also becoming increasingly important to investors, and this trend is likely to extend to the ILS market. Investors may seek out ILS that are tied to “green” infrastructure projects or that incorporate ESG factors into their underwriting criteria.

Carbon credit offsets are now being incorporated into nat cat bonds, which has been well received by the sector for its emphasis on sustainability and response to climate change.

The view of ILS Bermuda is that we will see a continued push to bring more efficiency to the process of matching risk to capital and investors getting closer to the risk. Innovative platforms have seen success as startups with the development of seamless technology-driven risk placement with insurance programmes placed on platforms with virtual private data rooms.

Insurtech companies are focused on unlocking cyber risk and ILS growth and leveraging their operational experience. Private distributed ledger technology (DLT) initiatives have the capability to revolutionise the way we do business by building efficient, trustworthy transactional ecosystems.

As the collateralised reinsurance hybrid market has grown and evolved, Bermuda has emerged as the natural leader for this segment because we are an actual market with intellectual capital on the ground and innovation in our collective DNA. We expect to see Bermuda continue to lead in the industry’s transformation.

“The mission of ILS Bermuda has always been to ensure that the capital and the talent comes to Bermuda.” Anna Pereira, ILS Bermuda

ILS Bermuda

The ILS Bermuda team is focused on maintaining Bermuda’s role as the global leader in ILS and runs a programme in partnership with Bermuda College, designed to enable students to gain direct exposure to Bermuda’s insurance, reinsurance and ILS industries.

Students have access to the ILS Convergence Conference and a full-year programme with practical, real-world engagement within the risk industry and multiple networking opportunities. This programme includes providing assistance with resumés and practice interviews for prospective employment, internships and work-shadow opportunities, year-round mentorships to help students in areas such as their career focus, assistance with university selections, scholarship application assistance and “lunch and learns” delivered by ILS team members and industry leaders.

The mission of ILS Bermuda has always been to ensure that the capital and the talent comes to Bermuda. As an industry group, our goal is to grow the business coming to Bermuda and facilitate the development of innovative risk solution products and expand the risk spectrum in an efficient way for a sustainable future.

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