The sector, which began with the placement of a USD45m all-peril catastrophe bond in 1996, has since seen a gradual increase in the utilization of insurance-linked securities (ILS) solutions by the re/insurance industry, with frequent new records being set in terms of annual issuance volumes.
In 2009, alternative capital stood at USD22bn, and during the past decade its average rate of growth has far exceeded that of traditional reinsurance capital. Since 2016, alternative capital has remained at or near record highs, with around USD93bn currently in the re/insurance marketplace of an estimated USD610bn total reinsurance capital. The volume of alternative capital is even more significant when compared to reinsurance capital, since the former is predominantly focused on property catastrophe risk.
For its part, Aon Securities has consistently led activity in the ILS sector. For example, in 2018 the team placed USD5.5bn in catastrophe bond notional across 11 transactions, representing 57 percent of the USD9.7bn total annual issuance. In 2019, the team placed USD3.1bn across eight transactions, representing 56 percent of the total USD5.4bn notional. In total, Aon Securities has brought 53 sponsors to market, structuring USD38.5 billion in catastrophe bonds across 131 offerings – 75 transactions for insurance companies, 46 transactions for reinsurance companies, and 10 transactions for governments and corporate entities.
Over the past decade, ILS has provided a robust non-correlating asset class for investors, producing an average annual return of 6.38 percent, and 7.48 percent for 2019. Sector investor numbers have grown significantly, with orderbooks in 2019 inclusive of 23 percent more investors, on average, than orderbooks in 2015, allowing average allocations to decrease from USD13m to USD9m, putting less pressure on any given market.
Over the years there has been an evolution in investor type – originally comprising primarily reinsurers and life companies, then hedge funds, and now inclusive of dedicated ILS managers and institutions, investing on behalf of a significant number of global pension funds involved as the upstream capital providers. Accordingly, as markets increased their level of sophistication and resources devoted to the space, ILS transitioned from being commonly perceived as an exotic alternative investment offering a large premium to a mainstay of many portfolios, supporting the expansion from simple parametric or industry loss structures to coverages more closely resembling those found in the traditional market.
The ILS market responded as expected to the natural catastrophes in 2017 and 2018.
Paul Schultz, CEO of Aon Securities, said: “From its beginnings in 1996, the insurance-linked securities sector has shown remarkable growth, reaching a point today where it is an integral component of the way in which re/insurers approach risk transfer. Having endured significant tests in recent times, the sector has shown strength in adversity, proving that re/insurers and investors view ILS as being an enduring and important part of the industry. Reaching this $100bn milestone is a fantastic achievement, and we anticipate many further successes for ILS in the years to come as it expands into a greater number of geographies and perils.”
As the largest underwriter of catastrophe bonds in eight of the past 10 years, Aon Securities is pleased to have helped drive this sector past the USD100bn milestone, having structured and placed more than USD34bn of cumulative new issuances in the ILS market since 2009, demonstrating its ability both to attract and retain sponsors and its role as market leader in bringing re/insurers and public entities to the capital markets.
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