Willis Towers Watson’s ILS update said a new peak of $93bn ILS in play after strong 2018 cat bond issuance “bodes well for a continued healthy market”

The insurance-linked securities (ILS) market continued to grow in 2018, reaching $93bn of outstanding non-life capital, Willis Towers Watson has observed.

Last year’s ILS growth “bodes well for a continued healthy market”, the re/insurance broker said.

After 2017’s heavy catastrophe losses and multiple smaller catastrophic events in 2018, non-life catastrophe bond issuance remained strong, the intermediary stressed in its ILS Market Update Q4 2018 report, published today.

About $9.2bn of new capital was delivered, according to Willis Towers Watson, marking the second most active calendar year so far.

This is despite a slow-down in ILS entering the re/insurance market during the final quarter of the year.

Of $535m in cat bonds issued during the fourth quarter, some $125m provides protection from California wildfire liability, $200m is peak multiperil protection, and another $210m covers US earthquake workers’ compensation.

Blurred lines

Lines of demarcation within the ILS space are blurring, according to the report, subtitled “Growth in the gaps”.

Ceding companies and intermediaries are looking to the range of cat bonds, sidecars and other collateralised ILS, according to Willis Towers Watson, to identify the best tools to meet specific challenges, develop new solutions, and refine existing structures.

This blurring of categories should help the ILS market to overcome concerns including prompt loss reporting, valuation accuracy, collateral release and rollover, and increasing volatility, the report contends, the broker suggested.

Two-way transparency is important, for both ceding companies and investors, the report suggested, adding that solutions to specific challenges seem close at hand.

“We are seeing the convergence of convergence,” said William Dubinsky, head of ILS at Willis Towers Watson Securities. “The overall ILS figure is today a much more meaningful measurement of market size than focusing on cat bond and sidecar issuance alone.

“ILS capacity and products are growing organically and dynamically as gaps between different products and subsectors fill in, and innovation and market necessity create new capacity and products,” he continued.

“Our confidence in the speed that new solutions will emerge gives us a favorable outlook for ILS in 2019,” Dubinsky added.

Willis Towers Watson spent some words in its report arguing the ambiguity in defining where ILS begins and ends, as the industry definitions remain inconsistent – particularly for the weight of private, non-liquid, collateralised reinsurance deals.

“We have nearly the smallest published industry figure for cat bonds every year, not because we believe the market is actually that small, but as with our overall non-life ILS figure, for consistency’s sake,” said the report.

“We would define cat bonds as ILS transactions with meaningful liquidity. Some private ILS transactions, mortgage insurance ILS and other assorted ILS transactions would also qualify on this basis but are more difficult to track consistently and accurately. While they do not show up in our annual figures, these other transactions are clearly part of the cat bond market,” it continued.

“The trouble is, where do you draw the line? If you include mortgage insurance ILS, do you also include the Fannie and Freddie deals with similar risk profiles that do not, technically speaking, work the same way as 2018’s numerous mortgage ILS deals?” the study asked.

The punch line, according to Willis Towers Watson, is that ILS capacity and products grow organically and dynamically, and that innovation and market necessity create new capacity and products.

Beyond the report’s 2018 scope, but an example of recent ILS expansion into pastures new, was a $10m AlphaCat and Ledger Investing ILS deal, issued this month in Bermuda, to securitise an auto insurance portfolio for non-standard passenger risks.

“Gaps between different products and subsectors fill in – redefining markets,” Willis Towers Watson’s study argued.

“We need to take note of this activity to see what is really going on,” the report added.

Year-end non-life ILS capital outstanding ($bn)

Year-end non-life ILS capital outstanding ($bn)