By Shaun Geils
Over the last seventeen years, following the inception of the insurance linked securities (“ILS”) sector in 1997, the market has witnessed steady growth as an alternative form of capacity to the reinsurance market. However, over the last two years, there has been a particular surge in activity as interest from both cedents and investors for this form of alternative risk transfer has gathered pace.
The recent flood of capital into the market resulted in a total of 37 ILS issuances in 2013, and this number looks set to be breached in 2014 with the number of issuances standing at 35 as at the end of the third quarter. The market has come a long way from the four pioneering deals that were set up in 1997. In fact, Aon Benfield recently noted that the alternative capital market now makes up 20% of the reinsurance catastrophe market – and if the ILS industry is able to maintain its current momentum, it is predicted it could move well beyond this in future years.
There are a number of factors that have contributed to this surge in ILS interest. On the demand side, investors have been attracted to the returns, diversification, and low correlation to the wider financial markets the sector offers. On the supply side, cedents are increasingly acknowledging the competitive pricing and broadening indemnity coverage it offers. There are also a number of other recent trends facilitating the expansion of the ILS market. One example is the introduction of private catastrophe bond platforms, which are an extension of the traditional transformer vehicles. Such platforms are aiding in reducing the structuring costs of these vehicles, previously an issue for small to mid-tier cedents, as well as enhancing liquidity for investors. Another encouraging trend has been the increase in diversification of perils being offered. The ILS market has traditionally been heavily weighted to US wind and earthquake risks, however, the last two years has seen the introduction of new perils such as storm surge, meteor impact, and volcanic eruption, as well as new currencies in the form a Japanese Yen bond.
“…the alternative capital market now makes up 20% of the reinsurance catastrophe market…”
From a jurisdiction perspective, the Cayman Islands have been involved in the ILS market from its infancy with it being a domicile of choice during the industry’s formative years. The domicile has evolved into an experienced base of ILS service providers who are well respected by many of the cedents and investors who transfer risk through this market. While recent years have seen a large increase in the number of domiciles offering ILS legislation and competing for this growing market, Cayman still remains one of the leaders and is home to approximately 50% of the cat bonds issued by those leading US property and casualty insurance companies who participate in this alternative sector.
With Cayman having legislation tailored specifically for ILS structures under its Class C classification in the Insurance Law, as well as knowledgeable and experienced service providers, it is well positioned to continue offering itself as a domicile of choice to the ILS market for many years to come.