Bermuda is driving the growth of the insurance-linked securities (ILS) market, a market that is expected to quickly accelerate, says a new research paper from professional services firm PwC.Co-authored by PwC Bermuda’s insurance leader Arthur Wightman, a white paper entitled ‘Unlocking the full potential of ILS’ states that in less than 20 years since the launch of the first insurance-linked securitisation, the ILS market has now grown to 14 percent of the global catastrophe reinsurance capacity. The market is now valued at more than $15 billion.The growth, says PwC, is set to continue.“So far in 2012, we have seen a surge in capital market convergence with reinsurance,” said Mr Wightman, PwC Bermuda’s insurance leader. “The sector is seeing lots of activity and Bermuda is in the driver’s seat of much of this, with a wave of start-ups that are more akin to asset managers than the traditional reinsurance structures of the past.”In May, Florida Citizens Property Insurance sold $750 million in cat bonds for hurricane cover and Everglades Re Ltd, a Bermuda-based special purpose insurer, will be the underwriting vehicle.There have also been announcements from major Bermuda reinsurers of collaterised reinsurance vehicles funded in part by capital markets.Yesterday broker Aon Benfield reported that sales of catastrophe bonds have reached a four-year high and are expected to hit $6 billion by the end of the year. New issuance and outstanding volumes of cat bonds have seen a growth of $2 billion in the first quarter of 2012 compared to 2011.“New capital flowing into the reinsurance sector is currently around $5 billion, with around $3 billion of that moving into the insurance-linked securities sector and the remainder into permanent capital facilities,” said Aon Benfield Securities CEO Paul Schultz.According to PwC, ILS has at times been portrayed as a threat to mainstream reinsurance, however, says the company, more and more traditional market participants are setting up their own ILS vehicles.“ILS allows investors to move in, capitalise on their investment and withdraw more quickly than mainstream insurance,” explained Mr Wightman. “Further, ILS products have become more standardised — with the market getting more used to them. For these reasons, many investors now see ILS as an opportunity to diversify their portfolios, while achieving attractive risk-adjusted returns.”But while ILS has cemented its place as a complement to traditional to reinsurance, says PwC, it still has some obstacles to overcome in order to go from a niche market to the mainstream.“In particular, sponsors have to overcome the wariness of a product that is seen by many investors as opaque and uncertain, much in the same way as they view traditional reinsurance,” said Mr Wightman. “It states that the key to this is being able to cut through the complexity of ILS and forge a better understanding of how the structures work, provide better risk insight and demonstrate how this matches up against the potential rewards.”Other hurdles include making the most of risk analytics, choosing between indemnity triggers and index or parametric triggers, the lack of standardisation and lack of understanding by rating agencies, among others.The paper, “Unlocking the potential of ILS”, can be downloaded at pwc.com/bm.