ILS Capacity Continues with Record-High $1.6 Billion Issuance

Willis Re has released its third quarter Insurance-Linked Securities (ILS) Market Update reviewing nonlife ILS activity for the quarter. The report findings reveal "a record-high $1.6 billion of nonlife ILS capacity was issued in Q3, 2018…. The total exceeds the former Q3 record of $1.4 billion achieved in 2013 and is well ahead of the 5-year average of $800 million."

Third Quarter ILS Issuance Overview

The report identified a breakdown of the $1.6 billion ILS issued in third quarter as follows.

• $200 million to provide peak multiperil protection
• $650 million to provide US earthquake protection
• The remainder covers new perils
  • $500 million to provide protection from flood resulting from US wind
  • $200 million to provide California wildfire liability protection

Some specific ILS transactions identified in the report include the following.

• AXIS secured additional capacity through Northshore Re II.
• Kaiser Permanente accessed additional capacity through Acorn Re.
• The National Flood Insurance Program added two tranches of notes issued through FloodSmart Re.
• Pacific Gas and Electric set up a single tranche through Cal Phoenix Re.
• The California Earthquake Authority renewed its Ursa Re 2015-1 B issue through Ursa Re 2018-1 D.

Index Triggers

The report also focused on index-triggered ILS, which, according to Willis Re, was touted as being able to "unlock massive amounts of capacity, grow the alternative capital market and close the protection gap." The organization said, however, that "the market has largely moved away from rather than toward index triggers and, in [its] view, will likely continue to do so."

Nonetheless, Willis Re said such triggers have a place, of which the primary advantages include the following.

• Enhanced speed of calculation and recovery
• Transparency
• Ease of understanding for all parties

In the report, Willis Re outlined the definition and uses of index triggers, which it says are based on "a proxy for actual loss" and less on "actual loss." For instance, according to the organization, proxies include industry loss indices based on the following.

• PERILS or Property Claims Services figures
• Pure parametric or parametric index triggers
• Modeled loss triggers or hybrids
• Population mortality and morbidity statistics

It also said the major possible drawbacks to index triggers include poor design (more complex and slower) and basis risk (mismatch between expected and actual recoveries).

In fact, the report said there is a trend away from index triggers that Willis Re feels, "reflects improved data, transparency, and understanding of indemnity risk rather than any inherent discomfort with index triggers," stating that "index triggers remain important in some special situations."

More details can be found in the free report available in the insights section on the Willis Towers Watson website.