'ILS market will broaden in 2018'
By Katherine Coates, Clifford Chance
The market is expanding in size and broadening in variety
The 2017 hurricane season tested the resolve of some existing participants in market insurance-linked securities (ILS) but we still expect see continued growth in ILS market globally.
The fourth quarter of 2017 saw considerable loss activity across all ILS investments with an estimated $630m in cat bond principal losses including hurricane, earthquake and wildfire activity.
Nevertheless, 2017 was a record year for the ILS market and also saw a number of life ILS launches as investors recognised the potential of long duration transactions that could provide assets well suited for matching long-term liabilities, such as pension liabilities.
This year is set to be another one of growth for ILS as the market recovers from recent disasters, replaces lost capital and investors continue to show interest in a broad range of ILS products.
We expect an expansion of ILS into broader categories of risk, given recent innovations in motor liability, pandemic ILS products and talk about terrorism and cyber ILS.
Developments such as the World Bank cat bond issuance in February 2017 and a possible foreign aid cat bond, which could provide a cost-effective response to catastrophes currently supported by the UK foreign aid budget, set a positive outlook for the use of ILS in disaster risk management.
Cyber risk is an emerging risk requiring significant risk capital that if managed properly could generate significant opportunities for the alternative risk transfer industry but there may be obstacles as the scale is huge and there is little loss experience to rely on for modelling.
The speed of further growth of the ILS market may be constrained by a number of factors, such as the relatively small allocations to ILS assets by institutional investors, the cyclical nature of the market and the response of the traditional reinsurance market on pricing.
In addition, the relatively small number of ILS fund managers and the ability to model and price new products accurately and in a way which meets the requirements of both cedants and investors may cause issues.
Clifford Chance advised Neon on the first UK ILS vehicle and Scor on its recent UK cat bond issuance.