A Record Year for Insurance Linked Securities

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According to Artemis, a leading news, analysis and data media service devoted to the catastrophe bond & insurance linked security, the amount of catastrophe bonds and insurance-linked securities (ILS) issued reached a record level in 2014^[1].

Ever since the emergence of the cat bond and ILS market in the mid 1990’s, the year 2014 recorded the highest level ever in a single year. This year the issuance of new catastrophe bond and insurance-linked securities reached a new record $8.794 billion, beating the previous record set in 2007. Moreover another new record was created when the outstanding ILS and catastrophe bond market grew by $4.5 billion and reached a level of $25.004 billion for the first time ever.

The year 2014 saw strong investor interest in new catastrophe bonds and ILS, as well as growing interest from sponsoring insurers and reinsurers. This year the transactions brought some welcome diversification to investors, as well as the return of a number of valued cat bond sponsors showing their commitment to the market.

As reported by Artemis, reinsurance and property catastrophe risks are perceived as an attractive alternative risk asset class by institutional investors such as pension funds and sovereign wealth managers. Thus, the ILS market is developing itself to support this investor interest and find new ways to respond to this investor demand.

Catastrophe bonds and ILS are part of a growing segment of the global reinsurance market. It is expected that the market will continue to grow as participants learn to appreciate the efficiency of this new capital model, however it may be disrupting for some. Artemis expects that for some traditional reinsurance companies, the growth of ILS and cat bonds is threatening traditional business model and taking away market-share. As a result a continued move towards alternative business models, such as reinsurers directly leveraging or managing new sources of capital is expected in 2015.

Artemis further expects that as new capital continues to find ways to access the returns of reinsurance and catastrophe risks it is expected that new business models, insurance and reinsurance products and secondary hedging markets will emerge.

Artemis further reported that a year ago it was expected that third-party and institutional investors would contribute as much as $60 billion to the global reinsurance market by the end of 2014. The strong catastrophe bond and ILS issuance helped the market reach this target.

2014 has been the busiest year on record for the catastrophe bond and ILS market,

but now attention is turned towards the performance in 2015 and whether the ILS and catastrophe bond market would be able to manage the $4 billion plus of maturities that are expected in the first-half of the year. Market participants expect to see a strong deal pipeline in 2015, and with the increasing investor interest and constant inflows of new capital from them, hopes are that the ILS market may surpass this year’s total in 2015.

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Reported by: Surbhi Jaiswal

Date : 2nd February, 2015