Willis Towers Watson examines where the ILS market stands

Willis Towers Watson examines where the ILS market stands

Willis Towers Watson examines where the ILS market stands “Thus far, as a whole, ILS (insurance-linked securities) investors and traditional reinsurers have performed well, supporting insurers as insurers in return do their job to serve policyholders.”

That was the verdict of the latest quarterly ILS market update by Willis Towers Watson Securities. Following multiple natural catastrophes – earthquakes and hurricanes – in the third quarter of 2017, it’s interesting to see how ILS investors have responded.

According to the report, not only are ILS investors dealing with the recent disasters by making payments to ceding firms, they also continue to raise more funds for further investments. In addition, Willis Towers Watson Securities noted that the anticipated reduction in the length and severity of market hardening because of ILS will benefit policyholders.

“The multiple events have effectively spread the loss among public and private primary insurers, reinsurers, and ILS investors rather than concentrating the loss more tightly on only one segment as might sometimes be true with a single event,” read the update. “As such, we neither expect large-scale impairments of reinsurers nor do we expect many ILS investors to suffer massive catastrophe bond losses or asset under management (AUM) declines more broadly.”

The update added that the choice of ILS instruments going forward will be impacted by how the various instruments perform not only for ceding companies but for investors as well. Also, while none of the quarter’s natural catastrophes was individually of the US$100 billion loss amount potentially capable of triggering a major price shift, the aggregate losses are estimated to reach US$100 billion.

Noting investors and reinsurers’ satisfactory performance, Willis Towers Watson Securities head of ILS Bill Dubinsky said the recent loss activity will provide clues as to what might happen when a US$100 billion-plus event does occur.

“In particular, I would point to the Mexican government’s FONDEN bond where the class A notes may see a total loss of principal, delivering US$150 million of disaster relief where it is vitally needed,” he noted.

For Fermat Capital co-founder and managing director John Seo – who was interviewed for the report – investor interest is at its peak.

“For better or worse, after a significant loss event many current and potential ILS investors are conditioned to put additional or first-time capital into ILS,” said Seo. “As a result, investor interest in ILS is higher now than ever before.”

Seo continued: “No doubt, this is due, in part, to an expectation that some reinsurers and insurers will firm up premiums for some programmes in 2018 and that this might have a spill-over effect on the ILS market, and I expect ILS to continue to play a role in moderating post-event rate increases.”


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