Record ILS issuance in Q3

A record-high $1.6 billion of non-life insurance-linked securities (ILS) capacity was issued in Q3, 2018, according to Willis Re.

The total exceeds the former Q3 record of $1.4 billion achieved in 2013, and is well ahead of the five-year average of $800 million, according to the new ILS Market Update.

The record issuance highlights the continued enthusiasm for ILS amongst issuers and investors, the report noted.

The activity puts this year’s total issuance – already at $8.7 billion by 31 September – on track to meet or even exceed last year’s $9.7 billion full-year record, Willis Re noted. The broker highlighted the cover for new perils during the quarter: $500 million for flood resulting from US wind, and $200 million for California wildfire liability.

Meanwhile, the market continues its move away from index triggers (including parametric triggers), preferring indemnity-based structures, the report noted. Of outstanding issuance on a 2018 year-to-date basis, 60 percent of bonds by capacity are triggered by issuers’ own losses, compared to just 40 percent in 2008.

The available premium or risk-spread discount for index triggered instruments has typically declined relative to indemnity triggers, and the share of index-triggered transactions has fallen in step, Willis Re said. “This good-news story reflects improved data, transparency, and understanding of indemnity risk, rather than any inherent discomfort with index triggers,” the report noted.

Nevertheless, index triggers remain important, Willis Re commented. Based on a proxy for actual loss, they remain common for retrocession cat bonds and ILWs. In addition, when underlying data quality is poor or the coverage is exceptionally difficult to model, index-trigger discounts often rise considerably, making the structures more attractive, as seen with recent sovereign natural catastrophe and extreme mortality ILS deals, Willis Re noted.

William Dubinsky, managing director & head of ILS at Willis Re, says the trend away from non-indemnity triggers is likely to continue, but notes their importance for some transactions. “As the insurance, reinsurance, and ILS markets work together to solve new problems for insureds, index triggers are a very useful tool to consider. They may not, on their own, close the global protection gap, dramatically grow the ILS market, or solve all cedant problems, but with creativity, unbiased advice, and sustained effort, they can still have a meaningful impact.”

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