Capital Discipline Boosts Record ILS Market: AM Best Report

The insurance-linked securities (ILS) market saw a record-breaking year in 2023, driven by sustained strong pricing for reinsurance capital, according to AM Best's recent market segment report, Disciplined Deployment of Capital Pays Off in Record-Breaking Year for ILS. Factors contributing to this growth included the absence of major insured loss events, ongoing efforts to reduce frequency risk in ILS portfolios, and favorable loss reserve developments from Hurricane Ian and Hurricane Ida claims.

While rate increases during the January 1, 2024, renewal season were less pronounced than the previous year, risk-adjusted spreads started to narrow due to the disciplined capital deployment by providers.

Emmanuel Modu, managing director of insurance-linked securities at AM Best, noted, "Capital inflows have mostly matched the growth in reinsurance demand rather than exceeded it. The available supply of capital is often being directed to the more remote layers of risk, making low-attaching, frequency-driven coverage still difficult to obtain."

The demand for reinsurance capital drove an increase in ILS capital supply in 2023. Guy Carpenter and AM Best estimated the total ILS market capacity at approximately $100 billion by the end of 2023, up by $4 billion from the previous year. While the outstanding property catastrophe bond market size was estimated at around $42 billion, exact figures for other segments like sidecar capacity and industry-loss warranty (ILW) capacity remained challenging to determine. However, cedents relied less on ILW capacity in the January 2024 renewals as ultimate net loss retro providers filled the gap.

The report also highlighted that ILS investors enjoyed record-high returns in 2023. The Swiss Re Global Cat Bond Index reported a return of 19.69 percent, while the Eurekahedge ILS Advisers Index recorded 13.97 percent, both surpassing previous records set in 2007.

In recent years, catastrophe bonds have generally outperformed collateralized reinsurance due to their lower attachment points. However, collateralized reinsurance strategies have been derisking by raising attachment points and tightening terms and conditions. Wai Tang, senior director of insurance-linked securities at AM Best, commented, "Results in 2023 vindicated that approach, allowing collateralized reinsurance strategies to post record returns despite global insured natural cat losses exceeding $100 billion."