Capital unable to get significant returns from ILS investment could bolt for greener pastures, a Fitch Ratings assessment has determined.

The report says the fallout from Hurricane Ian could test the investor appetite for bonds.

Reinsurers have used the insurance-linked securities market to manage risks and to pay insured losses, amid rising rates and increasingly volatile catastrophic losses.

Of its latest report, Fitch says: “ILS investors not properly compensated for risk or facing elevated losses amid fallout from Hurricane Ian may choose to reinvest capital elsewhere, which would exacerbate the demand/supply imbalance of the reinsurance sector, which is especially acute in the Florida property market.”

Fitch says: “ILS include catastrophe bonds, collateral reinsurance, sidecars and industry loss warranties, representing around 20 per cent, or $100 billion, of global reinsurance capacity.

“Cat bonds are approximately 30 per cent of the ILS market. Commentary from the Monte Carlo Rendezvous 2022 indicated a pipeline of ILS deals of $5 billion of additional reinsurance capacity, which would benefit insurers facing a hardening market.

“However, the ILS market will assume a fair share of losses from Ian, with Fitch estimating total insured losses of $35 billion to $55 billion, second only to Hurricane Katrina at $65 billion ($90 billion in 2021 dollars).

“As frequency and severity of losses have increased in the past ten to 15 years, modelling catastrophic losses and pricing risk effectively is challenged by secondary peril costs and potential effects of climate change on catastrophe events.

“Escalating inflation and litigation expenses also make controlling claim costs more difficult.”

After a quiet ten years following Hurricane Katrina (2005), major hurricanes have hit Florida in five of the past six years.

The report says: “The state remains attractive with its population growing over 16 per cent, or three million people from 2010 to 2020. Estimated losses from Ian will make the tenuous January 1 renewal season much more difficult.”