Just five companies accounting for 70% of industry investments, despite significant growth of alternative market

Although the insurance-linked securities (ILS) and catastrophe bond market has seen significant growth in recent years, US insurers continue to have minimal investment exposure to this asset class, according to AM Best.

The rating agency states that US investments in the ILS and catastrophe bond market are highly concentrated, with just five companies accounting for 70% of industry investments.

US insurers hold approximately $850m of the roughly $33 billion outstanding catastrophe bonds, despite the generally higher returns these bonds offer, given insurers’ continual search for yield and the low correlation of the asset class with the broader capital markets, which provides diversification.

The minimal exposure also comes as catastrophe bond issuance has reached record levels.

“Issuance in the 144a catastrophe bond market reached a record $12.5 billion in 2021, exceeding the previous record set in 2020 by almost $1.5 billion,” said Jason Hopper, associate director, industry research and analytics, AM Best.

“However, the global ILS market remains saddled with prior catastrophe losses, and the overall performance of ILS funds deteriorated despite another year of record catastrophe bond issuance.”