More selective capital and new records: Aon’s ILS outlook

Insurance-linked securities (ILS) have the opportunity to hit record issuance levels in 2022 amid an “orderly” market, according to Paul Schultz (pictured), chief executive officer of Aon Securities.

While evolving market dynamics are making an exact figure difficult to forecast, Schultz did note that issuance would, at the very least, be in the “upper echelons of where the historic figures have been”.

And, with 2023 just around the corner, Schultz anticipates this elevated view on issuance potential to move forward too.

Speaking to Intelligent Insurer, Schultz said: “As we move towards the 1/1 renewal and into 2023, we think the market is very orderly so we believe there’s going to be capacity and capital available from ILS managers to support growth for the remainder of 2022. We anticipate more growth in 2023.”

He added that the market will be in this period for a while, where re-underwriting of what “an appropriate return is for the risk taken” will continue to take place.

While new capital is flowing into the ILS market, it is being more selective than previously.

Schultz believes the arrival of capital this year will be very different from the influx in 2017, when “a tremendous amount of new capital came in following losses”.

“Now, capital is being a little more selective in the way it comes in. It’s not going to enter in a wholesale way like it did in 2017—it’s going to arrive in a much more thoughtful way, in a way that can be deployed and continue the objective of re-underwriting and obtaining a new view on risk and return.”

Opportunities and offerings

Schultz is confident that the ILS market is going to expand, in terms of incremental growth in what Aon is doing now but also with other opportunities on offer, helping to address markets and clients that are currently underserved.

“We see opportunities in less developed parts of the world, either through the World Bank-sponsored types of transactions or government types of transactions, to bring much-needed capacity and build resilience,” he added.

Also on the agenda are opportunities to expand the market through parametric approaches as compared to more conventional approaches.

Ultimately this market is going to expand into the non-natural catastrophe area, said Schultz, noting that cyber, IP, and new types of innovations and perils may present opportunities.

“We’ve been talking about this for a long time but I do feel it’s on the cusp of changing, so we will start to see more non-property cat come into the ILS marketplace,” he said.

“There will be an evolution of Aon’s role: new types of clients and risk, broader geographic opportunities, and structural changes that will enable growth.”

With traditional insurance capital more constrained, the ILS market seems to be seeing an uptick.

“Our pipeline continues to build quickly as there is an expectation that the traditional renewal will be more difficult than it has been in the past. As an intermediary, it makes sense to have broad access to capital and to figure out where there’s going to be the best execution, in order to reduce any potential volatility for clients.” said Schultz.

He added that the “dynamic” market attracts talented people which, in turn, is another of the reasons the ILS market continues to perform very well.

According to Schultz, Aon advises clients in a parallel way—continuing to talk to them about their traditional reinsurance, while at the same time, layering on the discussion around placing risk into the capital markets.

“Why did Aon and others create this capacity for clients? Diversifying capital sources and being able to advise clients holistically on the alternatives in the marketplace are the reason we decided to go into this space 25 years ago. In challenging times, that’s where you appreciate the ability to be able to advise in these different forms,” he concluded.