Aon’s Pennay: ILS maturity opens new growth pathways

Speaking with GR at this year’s Rendez-Vous de Septembre in Monte Carlo, Richard Pennay reflected on how far the ILS market has come and where it is heading next.

The Aon Securities CEO pointed to the structural change that has taken place over the past two years, as record growth in catastrophe bonds has pushed the sector firmly into the mainstream of reinsurance.

“The growth has been so substantial, it’s a bit of a structural change in the market,” he said. “There are fewer companies asking whether they should do a cat bond. It’s more a case of, ‘we will do a cat bond, how does it fit into the programme?’”

Cat bonds and sidecars

Catastrophe bonds remain the dominant product in ILS, with outstanding issuance at around $55bn. Pennay emphasised their efficiency, highlighting how investors value liquidity and transparency while cedants gain multi-year fixed protection.

Sidecars, meanwhile, have been experiencing renewed momentum. Estimated at $17bn today, they continue to attract investors on the back of strong margins in the underlying reinsurance business.

“The returns for the last two or three years have been absolutely stellar, and that’s attracting some more capacity into the market,” Pennay explained.

He stressed that sidecars also provide reinsurers with indemnity protection, a feature that distinguishes them from industry-loss triggered cat bonds.

“That’s why sidecars will always remain a key part of this market,” he added.

Casualty and cyber on the horizon

Pennay expects casualty ILS to build further momentum, supported by higher interest rates that make structures attractive to investors seeking asset-based returns.

“Casualty is a major line for all insurers and reinsurers, and they’re always looking to optimise that line,” he said.

Cyber remains the most intriguing growth prospect.

Beazley, Chubb and Axis have pioneering cat bond transactions for cyber, with Pennay forecasting steady expansion.

“Cyber will be very, very significant,” he said. “Corporations globally will be spending more on cyber insurance. That’s the one area where I think there will be long-term growth.”

For Pennay, the interplay between ILS and traditional reinsurance pricing is further evidence of maturity. Cat bonds are now large and liquid enough to influence benchmarks in the wider market, and he expects a spike in ILS issuance prior to traditional reinsurance’s 1/1 renewals.

“As the capital market has become bigger, there is an interplay between pricing in the capital market and pricing in the reinsurance market. That’s a sign of maturity,” he said.

While investors remain drawn by strong returns – 18% in 2023, 15% in 2024 and around 7% year-to-date – Pennay is cautious about suggesting radically new product lines. For him, the focus now is on consolidating recent growth.

“What’s next is really a consolidation of the growth,” he concluded. “We’ve seen capital markets growing at 20%. We think casualty is already about 20% of sidecars. As we move forward, it’s not that we’ll be having completely new products, it’s that the market will need to evolve and digest the growth it has sustained.”