Investment - Articles - ILS issuance falls in Q2, but long term outlook remains rosy


Insurance linked securities (ILS) issuance for the second quarter of 2016 (Q2 2016) was the lowest amount of Q2 issuance recorded over the past five years. The market experienced a net capital outflow during Q2 2016 as a substantial proportion of the Q2 2013 issuance matured. Furthermore, with the third quarter of the year traditionally being the quietest period for ILS issuance and around $800 million of deals scheduled to mature in the same quarter, the short term outlook for the ILS market does not appear to be very positive.

 However, Jay Patel, Insurance Analyst at Timetric’s Insurance Intelligence Center (IIC) believes that these are just short term fluctuations in a market with very large scope for expansion. A recent report by PCS notes that catastrophe bond transactions in 2016 mainly involved repeat sponsors, suggesting that there is potential to increase awareness and use of ILS.
 
 With interest rates not expected to rise significantly, if at all over the next few years and no recent major losses, demand from investors is relatively strong. Furthermore, the range of risks that are covered by ILS are becoming more diversified year-by-year due to demand for ILS focused funds for more diversification within the ILS asset class. As a result, the risks covered by ILS are set to become less dependent on the U.S. commercial property market. In Munich Re’s ILS Q2 2016 market update, the combined share of ILS issuance that covers either US Wind or US Earthquake has fallen from approximately 70% to fewer than 60% over the past five years.
 
 There are also some trends in the ILS market that are becoming clearer. The strong demand from investors and ILS funds means that the market is moving further towards indemnity based triggers for the payout of the bond. Insurers prefer indemnity triggers, as it minimizes the basis risk (the difference between the reimbursement of the insured loss and the actual incurred loss from the specified catastrophe). A recent report by Artemis found that in Q2 2016, indemnity triggers dominated issuance, accounting for 73% of all issues (the industry loss index trigger made up the difference accounting for 27% of all issues).
  

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