Willis Re report highlights slower growth for ILS market

The insurance-linked securities (ILS) market has seen growth slow for the second quarter in a row, according to the latest ILS Market Update from Willis Re, the reinsurance division of Willis Towers Watson. It shows that ILS growth slowed in the first quarter of 2019, following the reduction seen in the fourth quarter of 2018. Just over $1.1bn was raised through non-life catastrophe bond issues in the first quarter of 2019, compared with an average of $1.8bn during the most recent six first quarters. This is the lowest first quarter for total issuance in the past five years, and about one third of the record-breaking activity observed in the first quarter of 2018 ($3.1bn), according to Willis Re. The update notes that windstorm losses were the peril most commonly protected, with $450m of capacity dedicated to pure US wind peril, and $550m to peak multi-peril coverage. An additional c.$50m of diversifying multi-peril protection was issued. This included Atmos Re DAC, which provides frequency protection against weather-related perils, a first for the cat bond market. The cat bond provides protection against atmospheric phenomenon, snow pressure and flood, with an indemnity trigger on an annual aggregate basis. The Willis Re update also notes that another innovation was the first-ever issue of a £75m bond dedicated to terrorism reinsurance. Weighted average last-12-month risk premium for non-US wind-exposed bonds jumped 2.2 points to 6.5% in the first quarter of 2019, while for US wind-exposed instruments it rose 0.3 points to 6.1%, states the update. “Seasonality has contributed to market heaviness, whilst loss-affected bonds continued to be marked lower,” it adds. The update also examines the impact of models on ILS. “Recent cases of loss creep have put actuarial models to the test. Investors unfamiliar with loss creep now have a better understanding, and in future are likely to look closely at issuers’ records of timely and transparent loss reporting when making allocations. Given investors’ need for regular valuations, current modelling methods are being critically assessed,” it states. “More consistent valuation approaches may spur substantial growth in ILS capacity, as 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, commented: “We don’t believe the slowdown in issues we saw in the final quarter of 2018 and again in the first quarter of 2019 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 continued: “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 realised it needed to raise its game, and that effort is underway. Its success will be critical to maintain and restore long-term trust relationships between investors and cedants.”

Willis Re report highlights slower growth for ILS market

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