With predictions of $100 billion in insured losses, and reports of up to $12.5 billion of ILS capital trapped or lost, the third quarter is shaping up to be one of the most significant in recent years for the insurance industry.

That is the view of two top executives at PwC Bermuda, who see the insurance-linked securities market facing its first serious test, but also highlighting significant opportunities for the alternative capital industry.

The third quarter saw two Category 5 hurricanes, devastating wildfires and earthquakes.

Arthur Wightman, PwC Bermuda and insurance leader, said: “The third quarter is a milestone for the ILS market. There have been substantial ILS exposures to the recent Atlantic hurricanes.

“Owing to the significance and magnitude of these events, these financial instruments are being tested in a way not yet seen by the ILS market. Consequently questions over performance, stickiness of capital and market hardening will be answered over the coming months, providing insight into the future direction of ILS.”

David Gibbons, PwC Bermuda insurance partner, said: “The recent fires, storms and earthquakes represent the first significant test of the ILS market. These events have caused the erosion and/or lock up of existing ILS capital on current deals.

“There is, however, considerable capital on the sidelines. The willingness of investors to deploy this capital and the risk premiums they require in the aftermath of these events will evidence truly the robustness and longevity of the ILS market.”

In a statement the company noted that the size of insured losses being estimated for the third quarter indicate the reinsurance pricing cycle finally may have reached an inflection point.

Mr Wightman said: “The demand for new and innovative risk-transfer solutions and operating models persists.

“The recent catastrophes highlight the need to close the insurance gap for developed as well as developing economies.

“Simply put, more risk needs to come to the market and governments have a significant role to play in making this happen.

“In spite of the tests on the market this quarter, the signs are good for the sustainability of the ILS market, which has the potential to even leapfrog the traditional markets as new risks are required to be covered.”