Jefferies, a global investment banking firm, forecasts a significant rebound in the Insurance-Linked Securities (ILS) market, with CAT bond issuance expected to grow in 2023-2024 and expand into other ILS vehicles by 2025.
The firm anticipates the ILS market could double from approximately $100 billion to $200 billion by 2032.
This growth is expected to be driven by higher returns following challenges faced between 2016 and 2022, alongside other factors that could cap pricing for both ILS and traditional reinsurance, benefiting primary insurers.
Jefferies foresees long-term market growth due to several key drivers: the normalisation of collateralisation bid-ask spreads, increasing demand for insurer protection, advancements in third-party modelling of weather risks (including secondary perils), expansion beyond the North American market (currently over 80% of the market), and growth in lines of business like cyber and flood insurance.
These factors, coupled with the non-correlation appeal of ILS, are expected to support a continued increase in the ILS market, especially if 2024 turns out to be a quiet hurricane year.
The increased availability of ILS capital should primarily benefit primary insurers, who depend on reinsurance protection. Jefferies expects this influx to put pressure on Rates on Line (RoL) while broadening protection limits and offering more alternatives.
In the near term, Jefferies identifies supply as the main constraint on ILS growth, with capital hesitant after the challenges from 2016 to 2022.
However, demand remains high, particularly as traditional reinsurers remain cautious in their capital allocation and terms, showing limited interest in remote and attritional risks.
The ILS issuance in 2023-2024 has been largely concentrated in CAT bonds, which focus on remote risks that delivered better returns between 2016 and 2022. In the first half of 2024, CAT bond issuance hit a record $12.6 billion, driven by both new and repeat sponsors.
The firm anticipates a further increase in collateralised reinsurance and sidecar capital in 2025, assuming the 2024 hurricane season ends without significant losses.
This growth would be fuelled by the release of trapped capital from prior years, improved returns, and investor interest in improving property terms and conditions.
Several factors support their optimistic outlook for ILS growth into 2025 and beyond. Primary insurer demand for reinsurance is rising, with a notable gap remaining unfilled, particularly as traditional reinsurers maintain disciplined approaches to risk exposure.
Insurers are also seeking more robust protection, driven by financial inflation and the increasing frequency of weather-related events. Some industry executives have pointed to up to $50 billion in additional demand for property reinsurance in 2024 and 2025, highlighting the growing need for reinsurance capacity.
While traditional reinsurers have seen capital increases since the end of 2022, new capital formation has been modest, creating opportunities for ILS.
Jefferies also notes that reinsurers, as a whole, have been reluctant to significantly increase their capacity for property catastrophe (CAT) risks, preferring to improve risk-adjusted returns and lower volatility by moving to higher attachment points. This discipline is likely to hold steady.
The retrocession market, which is heavily dominated by ILS, also experienced tightening in 2023. Jefferies expects some loosening in 2024, which could create new growth opportunities for reinsurers, with more use of sidecar and collateralised reinsurance vehicles.
Primary insurers have responded to large weather losses and shifts in the reinsurance market by tightening terms and conditions and raising property rates.
While this tightening has moderated in 2024, underlying risks are now better priced, and there is growing interest in quota-share structures to capture these improvements. CAT bond spreads widened after 2022, offering more attractive expected returns.
Weather-related losses in 2022 and 2023 exceeded $100 billion, largely driven by numerous smaller secondary peril events. Despite this, ILS returns remained robust, with losses mostly contained by primary insurers.
If 2024 proves to be another benign year, Jefferies expects investor confidence to increase, with memories of the difficult period from 2017 to 2022 fading.
With trapped capital gradually being released—estimated at around $20 billion at the end of 2022, but recently reduced to high single digits—ILS capital will continue to flow back into the market.
Looking beyond 2025, the company sees significant potential for further growth in the ILS market. While the current $100 billion market is heavily concentrated in US property CAT, improvements in third-party modelling and a growing demand for coverage in areas like cyber and flood could present new opportunities.
To continue attracting investors, ILS will need to offer competitive yields, a low default history, and manageable counterparty credit risk.
The post Jefferies predicts strong growth in ILS market, doubling to $200bn 2032 appeared first on ReinsuranceNe.ws.