How reinsurance supported a record-breaking ILS year – AM Best

The insurance-linked securities (ILS) market witnessed an unprecedented year in 2023, marked by robust pricing levels for reinsurance capital.

As outlined in AM Best’s report titled “Disciplined Deployment of Capital Pays Off in Record-Breaking Year for ILS” a scarcity of significant peak peril insured loss events led to relatively stable rate increases for 2024’s renewal pricing. A minimal impact from severe convective storms also prompted strategic de-risking by ILS managers. This approach involved raising attachment points and tightening terms and conditions.

Notably, the positive loss development related to Hurricane Ian claims significantly improved the mark-to-market positions of Florida-exposed catastrophe bonds.

Both the Swiss Re Global Cat Bond Index and the Eurekahedge ILS Advisers Index achieved record returns, with catastrophe bond issuance volume reaching a new peak.

The report also highlighted that, in the absence of major peril loss events, capacity providers focused on seeking rate increases primarily in areas affected by losses, moving away from a more generalized approach to rate hikes.

Smaller-scale catastrophes drove losses for 2023

Swiss Re’s estimates indicate that total global natural catastrophe insured losses in 2023 amounted to approximately $100 billion, a decrease from $133 billion in 2022, in a year devoid of major disaster events. The losses for 2023 that did occur were attributed to a series of smaller-scale catastrophes.

The outstanding performance of catastrophe bonds, particularly due to their coverage of more remote risk areas less likely to be affected by severe convective storms, was underscored as a contributing factor to the sector’s record returns. This has positioned catastrophe bonds favorably compared to collateralized reinsurance, especially given their higher attachment points.

ILS managers are also optimistic that the strong returns will bolster efforts to attract additional capital in 2024, with the aim of a second year of increased interest in catastrophe bonds.

This surge in returns follows a period of premium increases and greater capital allocation to the catastrophe bond market, amid rising demand for reinsurance capital. The ILS market’s capital supply expanded by approximately $4 billion by the end of 2023, reaching an estimated total of $100 billion, according to AM Best and Guy Carpenter.

The report further details the estimated sizes of various segments within the ILS market, including the property catastrophe bond market at around $42 billion and sidecar capacity estimated between $5 billion and $7 billion.

Despite a strategic move up the risk tower, collateralized reinsurance capacity, estimated at $42 billion to $50 billion, remained below layers covered by catastrophe bonds, indicating a continued shift in capital towards catastrophe bonds and a preference for investing in remote risk layers.

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