Best’s Special Report: Re-Underwriting and De-Risking in Insurance-Linked Securities Market

17 March 2022

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The global insurance-linked securities (ILS) market remains saddled with prior catastrophe losses, a decline in assets under management for some prominent ILS funds and a drop in the overall performance of ILS funds despite another year of a record catastrophe bond issuance, according to a new report from ICMIF Supporting Member AM Best.

The Best’s Special Report, titled, Re-Underwriting and De-Risking in Insurance-Linked Securities Market, states that catastrophe loss experience was significant again in 2021, while losses associated with secondary perils continued to receive increased attention from reinsurers and ILS managers due to their magnitude. The substantial losses in recent years have made clear that rising rates are not enough to improve underwriting results for ILS managers and reinsurers. These losses have also led to a diminution of available capacity, particularly for aggregate reinsurance and retrocession. As a result, according to the report, for the January 2022 renewals, the ILS and reinsurance industries have focused negotiations on terms and conditions, restructuring coverage features such as adding per-event caps in aggregate covers and raising attachments and deductibles.

At the same time, issuance in the 144A catastrophe bond market in 2021 reached a record amount of approximately USD 12.5 billion, exceeding the previous annual record set in 2020 by almost USD 2 billion. The poor performance of some ILS funds contrasts with the positive performance of cat bonds.

“ILS fund managers are re-underwriting and de-risking their portfolios, as rate increases are no longer a panacea for improving underwriting results and satisfying skittish investors,” said Emmanuel Modu, managing director, insurance-linked securities, AM Best.

According to the report, COVID-19-related claims reserves continue to level off and stabilize. Coverage tightening and exclusions of communicable disease remained factors in January 2022 renewals, but price and attachment point increases have much greater influence.

“Despite the losses, the ILS market remains attractive to investors due to its low correlation with the broader capital markets, providing a valuable source of diversification,” said Wai Tang, senior director, insurance-linked securities, AM Best. “However, investors are understandably fatigued by the poor performance of some ILS sectors.”

To access the full copy of this special report, please click here.

Angela Yeo, Senior Director of Analytics, AM Best will join the Current state of the reinsurance market (panel session) at the forthcoming ICMIF Meeting of Reinsurance Officials (MORO) in Wiesbaden (Germany). The MORO takes place from Monday 16 to Wednesday 18 May 2022.

The topics to be discussed in the Current state of the reinsurance market session will include (but not limited to):

  • Review of renewals: pricing and capacity
  • Impact of rising inflation on the market
  • How the pandemic has disrupted the way we do business

For member-only strategic content on the cooperative/mutual insurance sector, ICMIF members have exclusive access to a range of online resources through the ICMIF Knowledge Hub.

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