ILS an increasingly viable reinsurance alternative, continued growth expected: Gallagher Securities
The insurance-linked securities (ILS) market is gaining ground as a viable reinsurance alternative, helped by reduced risk premiums, increased confidence in models, lower transaction costs and still-growing investor interest, leading Gallagher Securities to say it anticipates continued growth of the sector.
The broker dealer and investment banking arm of reinsurance broker Gallagher Re said that insurance-linked securities (ILS), including catastrophe bonds, have now “evolved significantly since the early days of the market.”
“They have become increasingly mainstream both as a source of risk transfer capacity for sponsors and as a source of diversification for capital market investors,” Gallagher Securities explained.
The cat bond segment has been growing strongly, “supported by a growing and increasingly sophisticated investor base.”
While on the sponsor side, “With reduced risk premiums, improved modeling confidence, and lower transaction costs, ILS continue to gain ground as a viable alternative to traditional reinsurance,” the company said.
The upshot is that cat bonds and ILS instruments have become increasingly mainstream structures for sourcing efficient reinsurance capacity from global institutional capital markets.
While in recent years the ILS market has continued to innovate, Gallagher Securities notes, with numerous first-time cat bond sponsors entering the marketplace.
Overall, Gallagher Securities estimates that non-life ILS capacity has grown by nearly 480% since 2010.
Back in 2010, the overall insurance-linked securities (ILS) market was estimated to between $19 billion and $20 billion in size, with catastrophe bonds the larger component of that at between $13 billion and $14 billion.
The outstanding market of catastrophe bonds has grown by approximately 276% over that same period, according to Artemis’ data.
But the growth of the collateralized reinsurance and private ILS market over the same period was faster, although has slowed considerably in the last five years or so.
With an ILS capital base of somewhere around the $115 billion mark today, with cat bonds making up $49 billion to $52 billion depending on the data source, the ILS market has carved out an increasingly important role in global reinsurance protection.
Looking ahead the company said, “As the market matures, Gallagher Securities expects continued growth, driven by the benefits of full collateralization, fixed multi-year pricing and access to a broad pool of capital markets investors.
“We expect the market will continue to grow as ILS are increasingly considered as an integral component of companies’ risk transfer programs.”
