Growth of the Insurance-linked securities (“ILS”) market continued to slow in the first quarter of 2019 following the reduction seen in the fourth quarter of 2018. Slightly more than $1.1 billion was raised through non-life catastrophe bond issues, compared with an average of $1.8 million over the most recent six first quarters, the lowest during the period, and around one-third of the record-breaking activity observed in the first quarter of 2018, according to a new ILS market update from Willis Re, the reinsurance division of Willis Towers Watson.
Windstorm losses were the peril most commonly protected, with $450 million of capacity dedicated to pure U.S. wind peril, and $550 million to peak multi-peril coverage. An additional approximately $50 million of diversifying multi-peril protection was issued, including a first: frequency protection against weather-related perils.
Another innovation, according to the Willis Re report, was the first-ever issue of a £75 million bond dedicated to terrorism reinsurance.
Weighted average last-12-month risk premium for non-U.S. wind-exposed bonds jumped 2.2 points to 6.5 percent in the first quarter of 2019, while for U.S. wind-exposed instruments it rose 0.3 points to 6.1 percent. Seasonality has contributed to market heaviness, while loss-affected bonds continued to be marked lower, Willis Re found.
According to the Willis Re report, 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. 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, 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 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 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.”
Learn more: www.willisre.com.
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].