Willis Re: ILS market growth slows for two consecutive quarters
Growth in the insurance-linked securities (ILS) market has slowed for the second quarter in a row, according to the Willis Re ILS Market Update.
Analysts found ILS growth had slackened off in the first quarter of 2019, following a drop in market development in Q4 2018.
In Q1 2019, just over $1.1 billion was raised through non-life catastrophe bond issues compared with an average of $1.8 billion over the most recent six first quarters. Q1 cat bond issues were the lowest during the six quarter period and represented about a third of the record-breaking activity observed in the first quarter of 2018.
The update report showed that windstorm losses were the peril “most commonly protected”, with $450 million of capacity dedicated to pure US wind peril and $550 million to peak multi-peril coverage.
An additional $50 million of diversifying multi-peril protection was issued, including the “first frequency protection against weather-related perils”. The update highlighted further innovations in the quarter with the “first-ever issue of a £75 million bond dedicated to terrorism reinsurance”.
It said the weighted average for the last-12-month risk premium for non-US wind-exposed bonds had increased 2.2 points to 6.5 percent in Q1 2019, while for US wind-exposed instruments it rose 0.3 points to 6.1 percent.
Analysts said “seasonality” had contributed to market heaviness, while loss-affected bonds continued to be marked lower.
Willis Re experts also said recent cases of loss creep have tested actuarial models, while investors previously unfamiliar with loss creep now have a better understanding and are likely to look closely at issuers’ records of timely and transparent loss reporting when investing in future.
Demand for regular valuations from investors has led to critical assessment of existing modelling methods and more consistent valuation approaches may “spur substantial growth in ILS capacity” analysts predicted. This is because it would “increase end-investors’ confidence in their evaluation of potential managers and support new allocations to the asset class”.
William Dubinsky, managing director and head of ILS at Willis Towers Watson Securities, said: “We don’t believe the slowdown in issues we saw in the final quarter of 2018 and again in Q1 reflects any long term change in appetite for ILS risk from the capital markets, but understandably some investors are looking harder at the mechanics. Data quality and accurate modelling are seen as essential and are under scrutiny, from the initial pricing throughout the life of a transaction.
“As ever, transparency is crucial, especially in post-loss reporting, which is becoming an important differentiator for cedants. Of course, transparency will still not eliminate reserve volatility, which is simply inherent to a business where every new event differs from its predecessors.”
He added: “Enhanced understanding on all sides, including with cedants, has had a flow-through impact on collateral release arrangements, which are negotiated with a better awareness of the economically realistic potential outcomes. The industry has realized it needed to raise its game, and that effort is under way. Its success will be critical to maintain and restore long-term trust relationships between investors and cedants.”
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