ILS has passed recent tests with flying colours: Aon

The insurance-linked securities (ILS) market has reacted in an orderly manner after the 2017 catastrophe losses, paying claims and reloading, and it doesn’t have to prove itself any more, Aon Securities CEO Paul Schultz suggested in a conversation with Monte Carlo Today.

In 2017 the re/insurance industry was hit by natural catastrophes resulting in overall insured losses of around $130 billion according to estimates, posing what some describe as the first test for a booming alternative reinsurance capital market.

The fourth quarter of 2017 saw considerable loss activity across all ILS investments, with some estimates of $630 million in cat bond principal losses including hurricane, earthquake, and wildfire activity.

But the ILS market has quickly recouped lost capital after the nat cat losses, issuing $1.3 billion of non-life catastrophe bond capacity.

“The outcomes from last year were orderly and professional, so we have moved past this notion that the market has to continue to be tested,” said Schultz.

As of June 30, 2018, the catastrophe bond market had reached a record for the sector, with the cat bond limit on-risk reaching $30 billion, an increase of $4.2 billion year on year.

And there are sufficient opportunities to grow further, for example in the property market, especially covering flood risk, Schultz said.

In August, the Federal Emergency Management Agency (FEMA) secured $500 million in reinsurance for its National Flood Insurance Program (NFIP) through its first cat bond issuance.

ILS can play an important role in deals that de-risk governments, for example through transactions led by the World Bank, which in February issued its largest ever catastrophe bond covering earthquake, providing the organisation with $1.36 billion of capital markets protection.

Expansion into perils such as cyber and terrorism, as well as other short tail risks in the specialty lines business, presents further growth opportunities. To further expand growth opportunities ILS managers have been developing relationships with managing general agencies as distribution vehicles, Schultz said.

“We do see this alternative capital continuing to grow,” he concluded.