Growth of the insurance-linked securities (ILS) market continued to slow in Q1 2019, following a reduction in Q4 2018, according to a Willis Towers Watson report.
Willis Re, the reinsurance division of WIllis Towers Watson, observed that slightly more than $1.1 billion was raised through non-life catastrophe bond issues in Q1 2019, compared with an average of $1.8 billion over the most recent six first quarters.
In the report, an update on ILS, Willis Re 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.
Additionally, approximately $50 million of diversifying multi-peril protection was issued, including frequency protection against weather-related perils, a first.
The first-ever issue of a £75 million bond dedicated to terrorism reinsurance was also seen.
According to Willis Re, recent cases of loss creep have put actuarial models to the test, and investors unfamiliar with loss creep now have a better understanding.
The report also noted that current modeling methods are being critically assessed, with more consistent valuation approaches potentially spurring substantial growth in ILS capacity.
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 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.”
