US Insurers' Investments in Catastrophe Bond Market Are Limited

Despite the significant growth in the insurance-linked securities (ILS) and catastrophe bond market in recent years, US insurers continue to make only minimal investments in the asset class, according to A.M. Best.

In a Best's Commentary, "US Insurers Have Minimal Investments in Insurance-Linked Securities and Catastrophe Bonds," the rating agency said that the US insurance industry's investments in ILS and catastrophe bonds are highly concentrated, with just 5 companies responsible for 70 percent of the industry's investments.

Best said that US insurers hold approximately $850 million of the approximately $33 billion in outstanding catastrophe bonds. That relatively low figure is despite the generally higher returns the bonds offer and insurers' ongoing search for yield, as well as the diversification benefit provided by the low correlation of ILS and catastrophe bonds with the broader capital market.

US insurers' minimal investments in catastrophe bonds come as issuance has reached record levels, Best said.

"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," Jason Hopper, associate director, industry research and analytics at A.M. Best, said in a statement. "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."

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