The insurance-linked securities (ILS) market experienced an unprecedented year in 2023, fuelled by robust reinsurance capital pricing, according to a recent analysis by AM Best.
The market’s performance was detailed in the credit rating agency’s report titled “Disciplined Deployment of Capital Pays Off in Record-Breaking Year for ILS,” with the surge attributed to various factors, including no significant insured loss events from peak perils, concerted efforts to reduce frequency risk in ILS portfolios, and positive developments in loss reserves for claims from Hurricane Ian and Hurricane Ida.
Emmanuel Modu, AM Best’s ILS managing director, noted: “Capital inflows have mostly matched the growth in reinsurance demand rather than exceeded it. The available supply of capital is often being directed to the more remote layers of risk, making low-attaching, frequency-driven coverage still difficult to obtain.”
Estimates by Guy Carpenter and AM Best put the total ILS market capacity at around US$100 billion at the end of 2023, marking a rise of about US$4 billion over the previous year. The outstanding property catastrophe bond market alone was valued at roughly US$42 billion, though the full market segmentation remains challenging to quantify with precision.
The report suggests minimal changes in sidecar capacity, maintaining at US$5 billion to US$7 billion, while industry-loss warranty (ILW) capacity was also pegged at US$5 billion to US$7 billion. Interestingly, the January 2024 renewal period saw a decreased dependency on ILW capital as providers of ultimate net loss retrocession offered increased capacity.
The year also set new benchmarks for ILS investor returns, outstripping all previous records. The Swiss Re Global Cat Bond Index recorded a return of 19.69%, and the Eurekahedge ILS Advisers Index posted 13.97%, both surpassing 2007 highs.
The report credits catastrophe bonds with outperforming collateralised reinsurance over recent years, largely due to the latter’s lower attachment points. However, Wai Tang, AM Best’s senior director for ILS, pointed out that strategies in collateralised reinsurance have also been adapting.
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