ILS: Progress in leaps and bounds
In 2017, Bermuda issued 24 special purpose insurers (SPIs) with reinsurance exposure consisting primarily of cat bonds, collateralised reinsurance and sidecars.
New insurance-linked securities (ILS) listings on the Bermuda Stock Exchange (BSX) totalled 103 securities for the year with a nominal value of $11.54 billion. This represents a 69 percent increase in the number of new securities listed in the year and an 87 percent increase in the nominal value.
At year-end, the total number of ILS listed stood at 227 securities with a total nominal value of $25.99 billion. Bermuda’s global market share reached record levels of approximately 84 percent, cementing the Island’s continued position as leader in the innovative asset class.
2018 is on track for record issuance. There are currently a record 249 ILS vehicles listed with an aggregate market capitalisation of $28 billion. The reported outstanding value of the market is approximately $33 billion.
The 2017 events were painful to many reinsurance companies and funds but ultimately losses ended up being less than expected. For a short period there was anticipation of substantial rate increases among some market participants. However, as the scale of the losses became clearer, the anticipated rate increases did not materialise.
Growth and advantages
Growth has been driven by large inflows of capital into the sector from investors ranging from retail, and family offices, to endowments/foundations and pension funds. These investors are global, coming from the US, Europe, and Asia.
In the past decade ILS has grown its share of the natural catastrophe market and its penetration into other exposures as innovative financial techniques are developed. In comparison to the traditional capital markets, ILS is still relatively small in its notional issuance. Aon Benfield estimates that the broader alternative capital market space reached $89 billion at year-end 2017.
In contrast, the OECD total pension fund investments were $25.4 trillion at year-end 2016. The supply-demand imbalance for ILS as a non-correlated asset is another reason that the rate increases post the 2017 events were so muted.
Pension funds are attracted to the class because of persistent low yields in other asset classes, as well as years of not meeting their assumed discount rates/return hurdles as a result of the dot-com crash and the financial crisis.
The ILS market was essentially tested in 2017 and demonstrated its resilience and ability to respond. This represents a significant achievement and is testament to the strength of the industry. There was no material drain on capital. We believe this gives investors confidence in the asset class and willingness to maintain and even increase their allocation. As assets under management allocations to alternative investments increases, appetite for ILS as an alternative asset class should increase as it becomes more mainstream.
The devastating natural catastrophe events in 2017 demonstrated Bermuda’s resilience, tried and tested infrastructure as well as expertise in property catastrophe. This reinforced Bermuda’s leading global position, longevity in the market and natural choice for SPIs and ILS.
Bermuda’s advantages:
