Best’s Market Segment Report: ILS Capacity Grows Modestly, as Catastrophe Bond Issuance Breaks Record

The capacity level in the insurance-linked securities (ILS) segment continues to grow at a modest pace, mostly aligning with market demand as opposed to exceeding it, according to a new AM Best report. In addition, AM Best estimates the property catastrophe bond market at approximately USD 45 billion at mid-year 2024, which represents growth of USD 3 billion.

The Best’s Market Segment Report, “ILS Capacity Grows, as CAT Bonds Issuance Breaks Record,” is part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo. Other reports, including AM Best’s annual ranking of the Top 50 global reinsurance groups and in-depth looks at the life/annuity, health, Lloyd’s and regional reinsurance markets, will be available during August and September.

At year-end 2023, Guy Carpenter and AM Best together estimated the capacity of the ILS market at approximately USD 100 billion. ILS capacity increased by mid-year because capacity from maturing deals was recycled into 2024 transactions, some capital created out of the record-breaking 2023 earnings was deployed, and a modest amount of new capacity entered the space, according to the report.

“One year of great returns is probably not enough to draw in material amounts of new capacity that would significantly soften the market,” said Emmanuel Modu, managing director, insurance-linked securities, AM Best.

The report also notes that the 144A property catastrophe bond market broke its single quarter issuance record in second-quarter 2024, with issuance of nearly USD 8 billion, beating the record set just last year. Total issuance volume for 144A property catastrophe bonds hit USD 11.9 billion in first-half 2024. Growth is coming from both new sponsors and renewal deal upsizing, according to the report.

Risk-adjusted rate changes in the ILS segment were flat to slightly down overall at mid-year renewals. Rate decreases in the more risk-remote layers of reinsurance towers were more pronounced, but rates tended to rise slightly at the lower layers of the tower, where capacity is scarcer. The dampened rate activity was not unexpected given the strong returns achieved by traditional reinsurers and ILS managers in 2023, as well as the lack of a major peak-peril catastrophe event since Hurricane Ian in 2022.

“Barring a major peak peril loss event in 2024, cedents will have more room to negotiate at the Jan. 1, 2025, renewal season,” said Wai Tang, senior director, insurance-linked securities, AM Best. “However, capacity providers are highly motivated to maintain discipline because the poor returns of recent years are still fresh in their minds.”

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=345768.

For future global reinsurance reports ahead of Rendez-Vous de Septembre, please visit Best’s Research.

Lastly, AM Best will host its annual reinsurance market briefing at Rendez-Vous de Septembre on Sept. 8, 2024, at 10:15 a.m. (CEST) in Monte Carlo. For more information, please visit http://www3.ambest.com/rd/rd.aspx?rd=RVDS2024.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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