ILS Market Capacity Hit $100 Billion in 2023

The ILS market reached $100 billion in 2023, driven by fewer major natural disasters plus efforts to de-risk portfolios, AM Best reports.
By: | March 18, 2024
woman's hand tracking market data on screen

The insurance-linked securities (ILS) market saw its capacity grow to approximately $100 billion at the end of 2023, driven by the absence of a major peak natural catastrophe event and ongoing efforts to de-risk portfolios from frequency risk, according to a recent analysis by AM Best.

The ILS market recorded unprecedented returns in 2023. The Swiss Re Global Cat Bond Index reported a return of 19.69%, while the Eurekahedge ILS Advisers Index posted a return of 13.89%.

These record returns were helped by favorable loss reserve developments on prior year events. For instance, the loss development from Hurricane Ian improved mark-to-market positions on Florida-exposed catastrophe bonds. Additionally, there were reductions in trapped capital from prior-year events like Hurricanes Ian and Ida, and Winter Storm Uri, Best noted.

The supply of ILS capital grew in 2023 as a result of the heightened demand for reinsurance capital, which Best said has been more disciplined.

“Capital inflows have mostly matched the growth in reinsurance demand rather than exceeded it,” said Emmanuel Modu, managing director, insurance-linked securities, AM Best. “The available supply of capital is often being directed to the more remote layers of risk, making low-attaching, frequency-driven coverage still difficult to obtain.”

ILS Market Capacity

AM Best and broker Guy Carpenter estimate total ILS market capacity at about $100 billion at year-end 2023, which is up about $4 billion from a year earlier.

AM Best estimates the outstanding property CAT bond market size at approximately $42 billion, but the remaining ILS market segmentation is difficult to estimate precisely, according to the report.

  • Sidecar capacity is estimated as being largely unchanged, at $5 billion to $7 billion.
  • Industry-loss warranty (ILW) capacity is estimated at $5 billion to $7 billion, with cedants less reliant on this type of capital at January 2024 renewals because ultimate net loss retro providers stepped up to provide capacity.
  • Collateralized reinsurance capacity is estimated at $42 billion to $50 billion. Best said that capital last year moved out of collateralized reinsurance into cat bonds, which have generally performed better because collateralized reinsurance contracts have had lower attachment points, according to Best.

“But collateralized reinsurance strategies have also been de-risking, by raising attachment points and tightening terms and conditions,” said Wai Tang, senior director, insurance-linked securities, AM Best. “Results in 2023 vindicated that approach, allowing collateralized reinsurance strategies to post record returns despite global insured natural cat losses exceeding $100 billion.”

Record CAT Bond Issuance

The catastrophe bond market experienced record issuance in 2023, with total issuance of 144A property catastrophe bonds—the most common type of CAT bond security—reaching $14.9 billion. This record volume was largely contributed by government-affiliated sponsors and new sponsors. Looking ahead to 2024, over $11 billion of outstanding principal is due to mature, with the potential for over $10 billion of issuance from sponsors with maturing catastrophe bonds.

The ILS market in 2023 also included a milestone in cyber ILS, with the successful launch of four 144A catastrophe bonds and three private placements. These transactions showed how ceding companies are able to tap into capital markets for cyber risk capacity.

There was also growing interest in parametric covers last year, especially from government sponsors, despite the high basis risk associated with the transparent, objective payout trigger.

Given these developments and performance, AM Best said the outlook for the ILS market in 2024 is positive.

Visit AM Best’s website to obtain a copy of the ILS market report.

The R&I Editorial Team can be reached at [email protected].

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