Cat bond market drives ILS growth, moderate expansion to continue: Moody’s

According to Moody’s Investors Service, the catastrophe bond market remains the key driver of growth in insurance-linked securities (ILS), expecting a moderate pace of growth to continue as cat bonds become increasingly embedded into cedent reinsurance towers.

But a rapid growth phase for the cat bond market is not anticipated by the rating agency, because of continued investor concerns regarding climate risk and the fact alternative capital remains largely allocated to natural catastrophe risks in reinsurance.

Cat bond market growth is expected to continue through 2024, Moody’s said, while it believes that collateralized reinsurance has “yet to rebound” after a challenging period of loss activity at softer rates.

Investor wariness of secondary perils remains a key factor in this, but at the same time Moody’s notes that demand for alternative reinsurance capacity is likely to remain high and we’ve noted signs of recovery in growth of assets under management at some collateralized ILS fund managers.

The rating agency explained, “Investor caution around collateralized reinsurance and the growing availability of other investment opportunities thanks to rising interest rates means the total influx of alternative capital over the next 12-18 months will likely be moderate.

“However, the market will continue growing over the medium term because alternative reinsurance structures’ short duration and low correlation with financial markets make them attractive to investors.”

Expansion into other classes of business, such as cyber cat bonds and ILS, is going to be a continued growth area, but Moody’s believes this will only be at a relatively slow pace, given the fact these are new areas for the market and data and models continue to be more limited in scope and availability.

On the demand side, Moody’s anticipates that there was decent demand for alternative capital solutions at the January 2024 reinsurance renewals.

“We expect primary insurers and reinsurers alike to complement their purchases of traditional reinsurance and retrocession with alternative capital structures at the January 2024 contract renewals.

“According to our survey, primary insurers are increasingly interested in collateralized reinsurance and catastrophe bonds compared with 12 months ago, while appetite for sidecars and insurance-linked funds is more limited,” the rating agency said, referring to its insights gleaned from cedents in advance of the renewal season.