The global insurance-linked securities (ILS) market issued a record-high $1.6 billion of non-life capacity in Q3, continuing its record pace for issuance in 2018, according to the latest ILS Market Update from Willis Re.
The total exceeds the previous record for Q3 of $1.4 billion achieved in 2013, and is well ahead of the five-year average of $800 million, which the report suggested highlights “the continued enthusiasm for ILS amongst issuers and investors”.
With this year’s total issuance already at $8.7 billion by 31 September, it is on track to meet or potentially exceed the $9.7 billion full-year record set in 2017.
The market recorded a historic start to 2018 and experienced the third most active Q2 to date.
Q3 saw a notable rise in coverage for new perils, with $500 million for flood resulting from US wind and $200 million for California wildfire liability.
The ILS market has continued to shift toward a preference for indemnity-based structures over index triggers.
Of outstanding issuance on a 2018-year-to-date basis, 60 percent of bonds by capacity are triggered by issuers’ own losses, compared to just 40 percent in 2008.
The available premium or risk-spread discount for index triggered instruments has typically fallen relative to indemnity triggers, and the share of index-triggered transactions has fallen in step.
The report noted that this “good-news story” was reflective of “improved data, transparency, and understanding of indemnity risk, rather than any inherent discomfort with index triggers”.
According to the report, index triggers do, however, remain important. Based on a proxy for actual loss, they remain common for retrocession catastrophe bonds and industry loss warranties.
The structures are also made more attractive when underlying data quality is poor or the coverage is very difficult to model as index-trigger discounts often rise considerably, as evidenced in the case of recent sovereign natural catastrophe and extreme mortality ILS deals.
William Dubinsky, managing director and head of ILS at Willis Re, suggested the shift away from non-indemnity triggers is likely to continue but noted they remain an important tool.
He explained: “As the insurance, reinsurance, and ILS markets work together to solve new problems for insureds, index triggers are a very useful tool to consider.”
“They may not, on their own, close the global protection gap, dramatically grow the ILS market, or solve all cedant problems, but with creativity, unbiased advice, and sustained effort, they can still have a meaningful impact.”
Mark Hvidsten, deputy chairman of Willis Re, said Willis Towers Watson’s decision to integrate its ILS business into Willis Re in May had strengthened the integrated team’s position to help cedants considering or entering ILS transactions.
Hvidsten stated: “The amalgamation of the reinsurance and ILS teams into a cohesive business unit allows us to offer integrated solutions that serve clients’ long-term needs.”
“Our capital markets professionals now work alongside reinsurance brokers to ensure that our brokers are best placed to offer integrated strategic advice to our clients across the full spectrum of capital solutions.”
