Investment - Articles - ILS market slow to return to normal

The insurance-linked securities (ILS) market declined year-on-year in the second quarter of 2019, with just below $1.7 billion of non-life ILS capacity issued through 11 cat bonds, down from $6.2 billion and $4.0 billion in Q2 2017 and 2018 respectively. That made the recent quarter the second-lowest second-quarter for issuance by volume in the past eight years, except for 2016. The number of transactions declined less than total transaction value, according to the new ILS Market Update from Willis Re Securities

 As in Q1, U.S. wind-focused deals dominated, including $650 million of pure coverage for the peril issued across three cat bonds, and $1.04 billion for peak multiperil protection. Notably, the U.S. Federal Emergency Management Agency again reinsured the National Flood Insurance Program through Floodsmart Re, which covers named-storm-related U.S. flood events with $300 million of capacity. In addition, four cat bonds were issued to provide more than $1.8 billion in cover for mortgage insurance risks.
 Reported loss creep continued to affect the ILS market but at a substantially reduced rate. At the end of Q2 2018, cat bond losses arising from the 2017 HIM hurricanes, California wildfires, and the Chiapas earthquake reached an estimated $755 million, roughly 3% of the $25.1 billion of widely distributed non-life cat bond capacity outstanding before hurricane Harvey. A year later, the total 2017 loss under cat bonds reached slightly more than $1.0 billion, or 4.2%, reflecting nearly a quarter billion dollars of loss creep, and a year-on-year rise of about 40%. Much of the market has recalibrated models and thinking to accommodate loss creep, and is closely watching the commencing wind season to set the tone for the year ahead.
 William Dubinsky, Managing Director & Head of ILS at Willis Re Securities, said: “Things are slowly returning to a more normal ILS environment, but relationships will still matter over the next six months if cedants are to get the protection they need at sensible pricing, terms, and conditions. The contracting ILS market required cedants to look elsewhere for capacity during the recent renewals. Those with at least some relationship-based treaties with long-established reinsurance partners on their books found it easier to plug the gaps, relative to those who buy reinsurance on a purely transactional basis. That is likely to be the case for the balance of the year at least. Both approaches have merits, however, and the ideal balance will be different for each reinsurance buyer.”
 The complete report is available for download here.

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