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Willis Re: ILS Market Slow To Return to Normal

Slow Sign-SF
August 13, 2019

The insurance-linked securities (ILS) market declined year-over-year in the second quarter of 2019, with just below $1.7 billion of nonlife ILS capacity issued through 11 catastrophe (cat) bonds, according to Willis Re's latest ILS Market Update. Issuance for the quarter was down from $6.2 billion (reported in the second quarter of 2017) and $4.0 billion (reported in the second quarter of 2018).

The report revealed that the number of transactions declined less than the total transaction value.

As in the first quarter, US wind-focused deals dominated, including $650 million of pure coverage for the peril issued across three cat bonds and $1.04 billion for peak multiperil protection. Notably, the US Federal Emergency Management Agency again reinsured the National Flood Insurance Program through Floodsmart Re, which covers named-storm-related US flood events with $300 million of capacity. In addition, four cat bonds were issued to provide more than $1.8 billion in cover for mortgage insurance risks.

Reported loss creep continued to affect the ILS market but at a substantially reduced rate. At the end of second quarter 2018, cat bond losses arising from the 2017 HIM (Harvey/Irma/Maria) hurricanes, California wildfires, and Chiapas earthquake reached an estimated $755 million, roughly 3 percent of the $25.1 billion of widely distributed nonlife cat bond capacity outstanding before Hurricane Harvey.

A year later, the total 2017 loss under cat bonds reached slightly more than $1.0 billion, or 4.2 percent, reflecting nearly a quarter billion dollars of loss creep and a year-over-year rise of about 40 percent. Much of the market has recalibrated models and thinking to accommodate loss creep and is closely watching the commencing wind season to set the tone for the year ahead, according to Willis Re.

William Dubinsky, managing director and head of ILS at Willis Re Securities, said, "Things are slowly returning to a more normal ILS environment, but relationships will still matter over the next 6 months if cedants are to get the protection they need at sensible pricing, terms, and conditions. The contracting ILS market required cedants to look elsewhere for capacity during the recent renewals. Those with at least some relationship-based treaties with long-established reinsurance partners on their books found it easier to plug the gaps, relative to those who buy reinsurance on a purely transactional basis. That is likely to be the case for the balance of the year at least. Both approaches have merits, however, and the ideal balance will be different for each reinsurance buyer."
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