Capacity in the non-life ILS market approached an all-time record at the end of September, totalling $27.3bn, according to Willis Re’s quarterly market update.
The capacity was surpassed only by the year-end total of $27.8bn for 2018.
Despite the overall growth there is wide differentiation across areas of the market with winners and losers beginning to emerge, said Bill Dubinsky, managing director and CEO of Willis Securities.
Liquid products such as cat bonds and investments, with lower projected losses, are likely to benefit in both Q4 and 2020, he added.
Sidecars are also seeing more interest, although investors are differentiating between products, he noted.
“Sidecar interest has picked up as well, but the extent to which this interest will translate into completed deals will depend very much on the specific opportunities presented to investors. Not all deals will meet their increasingly stringent criteria.”
However, some areas of the market such as ultimate net loss retrocession remain significantly under stress, Willis Re said.
Reduced loss creep, higher premiums and the associated improved risk-return profile have provided a tailwind which could also prompt new issues, the broker continued.
As well as the differentiation, the market will also be shaped by the increase in domiciles offering ILS as well as an increased likelihood of new types of risk and cedants joining the market, Willis said.
A driver of change from the regulatory side will be the impact of collateralised reinsurance regulations in Guernsey.
Guernsey’s new type of cover means that sophisticated parties can agree contractually to up to a 30-day gap in collateral to accommodate, for example, rollovers between years.
“You might call this ‘uncollateralised collateralised re’,” Willis noted.
The move is favourable for investors as they won’t need to provide the same collateral twice.
The changes in the UK, Bermuda, Singapore, France and other places could also shape the market.
A second trend to watch is market participants’ hunger to discover and transfer new risks, according to Willis.
“The reasons for improvement include the rise of a new source of capital from ESG [environmental, social and corporate governance] and impact investors. This is really an emerging trend in 2019,” the report said.
The broker also reported better risk modelling and valuation approaches building on both scientific advancement and lessons learned from recent loss and reserving history.