An interesting new report into the ILS market casts light on trends and key events throughout 2021 so far. Emerging trends highlighted previously which are expected to continue include the overall growth of the market, as well as a shift towards ESG and how insurance related strategies could be attractive to investors due to its socially motivated connections. It is an asset class which offers sponsors a way to diversify capacity sources and has consistently attracted new sponsors to enter the market – a trend which has contributed to the market’s growth three years in a row and is set to continue. Newer inferences include Swiss Re’s expectation that offering pandemic risk coverage will be a big growth area for ILS.

The Swiss Re bi-annual Report also details a case study of the Residential Re 2021-1 deal, the largest aggregate transaction of its kind since 2017 and the fourth largest multi-peril annual aggregate transaction to date. This deal occurred between the issuer Residential Reinsurance and the ceding insurer (and one of the most frequent ILS sponsors to date) USAA. With many other sponsors having abandoned the annual aggregator structure due to a number of loss events in 2017/8, investors in 2021 seemed to favour the single occurrence structure instead, as models were deemed more reliable. With the help of SRCM, USAA went through a dramatic structural change to its existing aggregator model, which in simple terms allowed it to improve its modelling risk metrics for high frequency events, making investors less reliant on historical event analyses. This allowed USAA to not only execute an aggregator-based transaction, but also of a considerably higher size than initially expected and at a competitive price.  

The secondary market has seen less trading activity in 2021 than in previous years. As new issuance activity increased in the first half of the year with greater demand for the ILS asset class, sellers have taken advantage of the overall willingness by buyers to pay a premium on open market bids.

With regard to bond payments and losses, payments to sponsors have been of a smaller amount in 2021 than in 2020 during the same months. While natural catastrophes have occurred this year so far, they are unlikely to have triggered a catastrophe bond, but they have caused significant losses to insurers. It is expected that the market will continue to harden in the near future, as new issuance spreads have continued to tighten in 2021 so far and some transaction types are showing all time lows in catastrophe bond pricing.

However, the Report was also keen to show that catastrophe bonds have shown less volatility than similarly rated credit asset classes within capital markets which have been generally very volatile since the Covid-19 pandemic and can offer investors more stability in terms of spreads.