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Record-breaking ILS year due to disciplined capital deployment

Bermuda is the leading jurisdiction for insurance-linked securities (File photograph)

Sustained strong pricing levels for reinsurance capital is among the factors that helped generate a record-breaking year for the insurance-linked securities market in 2023, according to the AM Best report Disciplined Deployment of Capital Pays Off in Record-Breaking Year for ILS.

But also among the principal takeaways of the report is that a lack of major peak peril insured loss events translated into more muted rate increases for 2024 renewal pricing.

The minimal exposure to record severe convective storms in 2023, as a result of sustained de-risking by ILS managers, improved results.

Attachment points were raised, while terms and conditions were tightened. The report suggests the de-risking initiatives may have had more impact on the improvement in results than the rate increases.

Favourable loss development on Hurricane Ian claims led to an improvement in mark-to-market positions on Florida-exposed cat bonds.

The Swiss Re Global Cat Bond Index and Eurekahedge ILS Advisers Index posted record returns, and cat bond issuance volume reached an all-time high.

The report said that given the lack of significant peril loss events, capacity providers sought rate hikes in loss-affected areas only, instead of across-the-board increases.

Swiss Re has estimated that total global natural catastrophe insured losses in 2023 were about $100 billion (2022: $133 billion), without a major event. The 2023 losses came from smaller catastrophe events.

Cat bond returns set records because the per-occurrence deals in particular cover remote areas of risk, not likely impacted by severe convective storms. Cat bonds have performed better than collateralised reinsurance in recent years because of higher attachment points.

ILS managers believe the strong returns will help in their 2024 attempts to raise capital, as they seek a second consecutive year of a strengthened appetite for cat bonds.

Record returns for cat bonds in 2023 came after premiums rose and capital providers deployed more capital to the cat bond market.

With more demand for reinsurance capital, the 2023 ILS capital supply grew. AM Best together with Guy Carpenter estimate ILS market capacity up by $4 billion at year-end to about $100 billion from December 2022.

AM Best estimated the size of the outstanding property cat bond market at some $42 billion, and sidecar capacity at between $5 billion and $7 billion.

Collateralised reinsurance, with capacity estimated at $42 billion to $50 billion, has moved up the risk tower as part of the de-risking efforts, but remains below layers covered by cat bonds.

Capital continued to move from collateralised reinsurance to cat bonds, and investors showed a preference for the remote risk layers.

The report said that the record returns for ILS investors strengthened the case for managers raising 2024 ILS capital.

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Published April 09, 2024 at 7:58 am (Updated April 09, 2024 at 7:25 am)

Record-breaking ILS year due to disciplined capital deployment

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