Willis Towers Watson: ILS market slows further in Q1 2019 following reductions in Q4 2018 as yields continue to drift higher
Growth of the Insurance-linked securities (ILS) market continued to slow in the first quarter of 2019 following the reduction seen in Q4 2018. Slightly more than $1.1 billion was raised through non-life catastrophe bond issues, compared with an average of $1.8 billion over the most recent six first quarters, the lowest during the period, and around one-third of the record-breaking activity observed in Q1, 2018, according to the new ILS Market Update from Willis Re, the reinsurance division of Willis Towers Watson, the leading global advisory, broking and solutions company (NASDAQ:WLTW).
Windstorm losses were the peril most commonly protected, with $450 million of capacity dedicated to pure US wind peril, and $550 million to peak multi-peril coverage. An additional c. $50 million of diversifying multi-peril protection was issued, including a first: frequency protection against weather-related perils. Another innovation was the first-ever issue of a £75 million bond dedicated to terrorism reinsurance. Weighted average last-12-month risk premium for non-US wind-exposed bonds jumped 2.2 points to 6.5% in Q1 2019, while for US wind-exposed instruments it rose 0.3 points to 6.1%. Seasonality has contributed to market heaviness, whilst loss-affected bonds continued to be marked lower.
Recent cases of loss creep have put actuarial models to the test. Investors unfamiliar with the phenomenon are now up to speed, and in future are likely to look closely at issuers’ records of timely and transparent loss reporting when making allocations. Meanwhile modelling to establish current valuation is critical to investors, who require regular valuations. Valuation modelling treatments have been disparate to date. Harmonization of valuation approaches may spur substantial growth in ILS capacity, as it would build end-investors’ confidence in their evaluation of potential managers and in new allocations to the asset class.
William Dubinsky, Managing Director & Head of ILS at Willis Towers Watson Securities, said: “We don’t believe the slowdown in issues we saw in the final quarter of 2018 and again in Q1 reflects any long term change in appetite for ILS risk from the capital markets, but understandably some investors are looking harder at the mechanics. Data quality and accurate modelling are seen as essential and are under scrutiny, from the initial pricing throughout the life of a transaction. As ever, transparency is crucial, especially in post-loss reporting, which is becoming an important differentiator for cedants. Of course, transparency will still not eliminate reserve volatility, which is simply inherent to a business where every new event differs from its predecessors.”
He continued: “Enhanced understanding on all sides, including with cedants, has had a flow-through impact on collateral release arrangements, which are negotiated with a better awareness of the economically realistic potential outcomes. The industry has realized it needed to raise its game, and that effort is under way. Its success will be critical to maintain and restore long-term trust relationships between investors and cedants.”
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About Willis Towers Watson Securities
Willis Towers Watson Securities, with offices in New York, London, Hong Kong and Sydney, provides advice to companies involved in the insurance and reinsurance industry on capital markets products, including acting as underwriter or agent for primary issuances, operating a secondary insurance-linked securities trading desk and engaging in general capital markets and strategic advisory work. Willis Towers Watson Securities is a trade name used by Willis Securities, Inc., a licensed broker dealer authorized and regulated by FINRA and a member of SIPC (“WSI”), Willis Towers Watson Securities Europe Limited (Registered number 2908053 and ARBN number 604 264 557), an investment business authorized and regulated by the UK Financial Conduct Authority (“WTW Securities Europe”) and Willis Towers Watson Securities (Hong Kong) Limited, a corporation licensed and regulated by the Hong Kong Securities and Futures Commission (“WTW Securities (HK)”).
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