Strong pricing levels for reinsurance propelled ILS market in 2023: AM Best

According to rating agency AM Best, the strong pricing levels for reinsurance capital was one factor that helped generate a record-breaking year for the insurance-linked securities (ILS) market in 2023.

Throughout last year, reinsurance pricing rose in numerous business lines, and notably in property catastrophe, which is where much of the ILS capital participates.

As a result of this and other factors, ILS investors pushed for higher returns, and as noted by AM Best, experienced the highest spreads on record in 2023, with the Swiss Re Global Cat Bond Index posting a return of 19.69%, and the Eurekahedge ILS Advisers Index a return of 13.97%.

Other factors that contributed to an impressive year for the ILS market, according to AM Best, include the lack of a major peak peril insured loss event, sustained efforts to de-risk ILS portfolios from frequency risk, and favourable loss reserve development on Hurricane Ian and Hurricane Ida claims.

The report finds that the supply of ILS capital grew in 2023 due to heightened demand for reinsurance capital. In fact, Guy Carpenter and AM Best estimate total ILS market capacity at about $100 billion at year-end 2023, an increase of $4 billion from a year earlier.

Emmanuel Modu, Managing Director, insurance-linked securities, AM Best commented, “Capital inflows have mostly matched the growth in reinsurance demand rather than exceeded it. The available supply of capital is often being directed to the more remote layers of risk, making low-attaching, frequency-driven coverage still difficult to obtain.”

AM Best estimates the outstanding property catastrophe bond market size at approximately $42 billion at year-end 2023.

Reinsurance sidecar capacity is estimated as being largely unchanged at $5-7 billion, while industry-loss warranty (ILW) capacity is also estimated at $5-7 billion.

The rating agency pegs collateralized reinsurance capacity at an estimated $42-50 billion, with the firm noting that capital continued to move out of collateralized reinsurance and into cat bonds, driven by the fact cat bonds have generally outperformed collateralised reinsurance in recent years.

Wai Tang, Senior Director, of insurance-linked securities, AM Best concluded,  “But collateralized reinsurance strategies have also been de-risking, by raising attachment points and tightening terms and conditions. Results in 2023 vindicated that approach, allowing collateralized reinsurance strategies to post record returns despite global insured natural cat losses exceeding $100 billion.”

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