Reinsurers increasingly using ILS as catastrophe losses surge

Reinsurers are increasingly turning to third-party capital to support their retrocession needs amid rising catastrophe losses, a new report has shown.

According to S&P Global Ratings, nearly 15 percent of total reinsurance capital is sourced through insurance-linked securities (ILS) issuances, while the share is increasing significantly within the retrocession market.

"In 2021, they ceded about 50 percent of their exposures at a 1-in-250 return period through collateralised instruments, such as insurance-linked securities (ILS)," said S&P's credit analyst Maren Josefs.

ILS is expected to increase its market share over the next few years as innovative new issuances address new risks, such as cyber, climate change, and environmental, social and governance (ESG), predicts the agency.

"The more peak exposures the reinsurance market transfers to a broad range of ILS investors, the better for the stability of the system and the growth of the market," said Josefs.

In terms of returns, this year remains uncertain, S&P noted. Given the occurrence of fresh catastrophes, 2021 natural catastrophe losses are likely to exceed reinsurers' budget expectations yet again.

According to Swiss Re, the first six months of 2021 delivered the second-highest natural catastrophe-insured losses ($40 billion versus a 10-year average of $33 billion), with Winterstorm Uri in Texas in February being the costliest event ever recorded for the peril of severe convective storms and winter storms.

Despite these setbacks, S&P expects investor interest in the ILS asset class to remain strong, as long as the market stays disciplined. "We therefore expect the ongoing flight to good quality ILS asset managers to continue," it said.

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