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Continued ILS Issuance Slowdown in First-Quarter 2019

Slow Sign-SF
May 13, 2019

Following fourth-quarter 2018 insurance-linked securities (ILS) growth reduction, ILS market growth continued to slow in the first quarter of 2019. First-quarter 2019 raised $1.1 billion through catastrophe bond issues as compared to an average of $1.8 billion over the 6 preceding first quarters.

This is according to the May 2019 Willis Re report: ILS Market Update: Appetite Rises with Understanding.

Willis Re revealed that first-quarter 2019 issuance was approximately one-third of first-quarter 2018 record-breaking activity. In the first quarter of 2019, windstorm losses were the perils most commonly protected with $450 million of capacity dedicated to pure US wind peril and $550 million to peak multiperil coverage. In total, first-quarter 2019 non-life ILS issuance was $1,051 million, according to the Willis Re report.

Willis Re believes that models will play an increasingly important role in the future, and the report highlighted the continued significance of using high-quality data in reliable catastrophe models along with experienced underwriting judgment.

The report continued as follows.

However—and this is where ILS differs most meaningfully from traditional property catastrophe reinsurance—the ILS market relies on models beyond the initial pricing assessment largely due to the importance of collateral and the means for financing it. First, in conjunction with cedant reporting, both catastrophe models and actuarial models help investors value their investments on a post-loss basis. Second, traditional financial valuation models also play an important role in ILS investment and trading. The last few years have taught the ILS community valuable lessons on the theory, practice, and promise of these various models.

Willis Re pointed to the increased importance of transparency surrounding postloss reporting in light of recent (now corrected) failures of some ILS funds "to appreciate and communicate the potential for loss creep on a transparent basis to their end investors."

Increased understanding for all involved has improved awareness surrounding collateral release arrangements that account for more realistic expectations concerning potential outcomes, according to the report.

Finally, the report found that valuation models have been "severely tested" in recent years. Specifically, the report said, "When changes in the liquid market are ignored for the wrong reasons in valuing illiquid instruments, it can lead to potentially misleading valuations, understating volatility and a portfolio mix skewed to illiquidity."

For more details, download the full report on the Willis Towers Watson website.

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