ILS market share could be a third by 2017

The percentage of non-life catastrophe reinsurance ultimately covered by some form of insurance-linked securities (ILS) will double over the next four years, to the point this form of risk transfer could represent a third of the total market.

That is one of the conclusions of a report, called Insurance-Linked Securities for Institutional Investors, by Clear Path Analysis. The report focuses on the attraction and challenges of ILS and includes comments from several industry leaders.

By adding together the size of the existing cat bond market with what it estimates is a similar sized collateralised insurance market, it claims that this form of alternative capacity is already worth close to $30 billion. And it believes this will double over the next five to ten years.

“The current market for non-life catastrophe reinsurance capacity is about $180 billion; essentially the total capacity purchased in the reinsurance industry by primary insurance companies,” said Michael Stahel, partner at LGT Capital Partners.

“Of this, the pure non-life cat bond market is roughly $14 billion. But add to that the $15 billion collateralised insurance market and it brings the total close to $30 billion. We believe that this number can grow considerably over the next 5-10 years and as a result, up to a third of the entire market – around $50-60 billion of capacity – may be provided by investors by 2017.”

This year is already predicted to be a bumper one for cat bonds, something the report picks up on.

“2013 is on pace to exceed 2012 as sponsors continue to embrace the effectiveness of capital markets-based protection in their risk management programmes,” said Cory Anger, managing director at Guy Carpenter Securities. “Conservative institutional asset managers, the custodians of trillions of dollars of investable assets, have largely accepted catastrophe risk as a component of mainstream investment strategy.”

And any fears that so much demand from investors would ultimately push pricing down to less attractive levels are unfounded, according to other commentators in the report.

Dr Gero Michel, chief risk officer and head of Risk Analytics at Montpelier Reinsurance (Blue Capital), states that in the long term, the market will always recoup short term losses. He said that large losses usually trigger capital shortages followed by premium, price increases and capital influx. This means catastrophe reinsurance is unlikely to follow the fate of other lines which have remained in deficit for many years.