Despite another year of record catastrophe bond issuance, the global insurance-linked securities (ILS) market remains burdened with prior catastrophe losses, a decline in assets under management for some prominent ILS funds, and a drop in overall performance of ILS funds, according to AM Best analysts.
that 2021 saw significant catastrophe loss experiences, while secondary peril losses continued to receive increased attention from reinsurers and ILS managers due to their magnitude
Significant losses in recent years have demonstrated that rising rates are insufficient to improve underwriting results for ILS managers and reinsurers.
These losses have also reduced available capacity, especially for aggregate reinsurance and retrocession.
As a result, the ILS and reinsurance industries have focused negotiations on terms and conditions for the January 2022 renewals, restructuring coverage features such as adding per-event caps in aggregate covers and raising attachments and deductibles, according to AM Best.
At the same time, issuance in the 144A catastrophe bond market reached a record of approximately $12.5 billion in 2021, nearly $2 billion more than the previous annual record set in 2020.
The poor performance of some ILS funds contrasts with cat bonds’ positive performance.
“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.
COVID-19-related claims reserves, according to the report, are continuing to level off and stabilize.
Coverage restrictions and communicable disease exclusions remained factors in January 2022 renewals, but price and attachment point increases had a far greater impact.
“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,” Wai Tang, senior director, Insurance-Linked Securities, AM Best, said.