ILS market expands to $46b amidst rising reinsurance prices

Investors have reaped substantial benefits from wider risk margins.

The insurance-linked securities (ILS) market has experienced significant growth over the past twelve months, expanding to $45.6b, reflecting an 18% increase from the previous year. This surge is attributed to capital inflows that began in early 2023, spurred by the relatively mild impact of Hurricane Ian, which made landfall in September 2022.

This growth was marked by record-breaking catastrophe bond issuance in three of the last four quarters, according to Aon’s ILS Annual Report.

Investors have reaped substantial benefits from wider risk margins, and the appeal of ILS as a diversification tool has been strongly communicated to end allocators. 

Record returns in 2023 have continued into 2024, further boosting the sector's performance. 

This success has been timely for insurers, reinsurers, corporates, and governments, who face rising prices in both insurance and reinsurance markets, leading to unprecedented demand for additional ILS capacity.

The period from the fourth quarter of 2023 (Q4 2023) through Q2 2024 saw a surge in new issuances, with 64 sponsors bringing 76 transactions to the market. 

Notably, new entrants and entities returning to the market after a decade attracted strong investor interest by offering more diverse risks and new perils, including the introduction of cyber risk to catastrophe bond investors for the first time. 

This move into cyber risk represents a significant step forward, setting the stage for further growth as businesses globally grapple with this evolving threat.

Investors have also benefited from more geographically diverse portfolios and a wider range of risks, including commercial and specialty risks, which enhance the market's attractiveness due to its lack of correlation with broader financial markets. 

The ILS market's expansion comes at a time when the demand for risk transfer is at its highest, driven by inflation, changing weather patterns, and efforts to close the protection gap.

As allocators increasingly recognize the value of uncorrelated, consistent returns, the ILS market has outpaced growth in other sectors of the insurance industry. This influx of capital, supported by a more diversified risk portfolio, has strengthened the insurance industry's resilience, benefiting all stakeholders involved.