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Willis: ILS could hit new heights in 2015

WCMA CEO Tony Ursano

Insurance-linked securities could be heading for a second successive year of record issuance, says a unit of global insurance and reinsurance broker Willis Holdings Ltd.

Willis Capital Markets & Advisory said in a report that investor interest was continuing to grow in the catastrophe bond space.

In the fourth quarter of 2014, catastrophe bond issuance totalled $2.1 billion, capping the record year which saw more than $8 billion of non-life catastrophe bonds issued. The previous record high was $7.2 billion in 2007.

Tony Ursano, WCMA’s chief executive officer, said: “It took over seven years to break 2007’s ILS issuance record. In the current climate there are no signs of growth abating and we could very easily see two consecutive record-breaking years. We would not be surprised to see $9 billion of issuance in 2015.”

William Dubinsky, managing director and head of ILS at WCMA, highlighted three trends in a market in which reinsurance rates have fallen in response to lower-than-normal catastrophe incidence and an influx of third-party capital.

Firstly, 2014 saw the extension of many terms and conditions from the collateralised reinsurance market to the catastrophe bond market.

Secondly, while spreads fell, assets under management (AUM) grew. “In the absence of any major market moving events we expect spreads to decline and AUM to grow,” said Mr Dubinsky. However, the report also outlines that the rates of both decline and growth are likely to flatten.

“As a reaction, some investors will reach for yield and accept more risk while others may lean towards more transparent risk transfer with modest expected returns,” Mr Dubinsky said.

The third trend noted is that large reinsurance buyers are challenging the status quo.

“Large ceding companies are now active users of the capital markets via catastrophe bonds, collateralised reinsurance and sidecars but some have seemingly reached a plateau in their ILS strategies under current conditions,” Mr Dubinsky said.

The report notes that companies could move significantly more of their reinsurance to both aggregate coverage and over a much longer term, for example of up to between seven and ten years.

“The capital markets can support both these features,” Mr Dubinsky said. “With longer term reinsurance capital in place these companies would have the advantage of being able to rely on stable reinsurance capacity in their underwriting.”