Not since Katrina in 2005 has the mainland United States been witness to a category 5 storm that resulted in widespread and costly devastation. Now, first Harvey, and then Irma. What does this mean for the ILS market? To begin with, the ILS market never billed itself as a replacement for traditional reinsurance, but rather, as another source of capacity. Given the damage now being tallied in connection with Harvey and Irma, the market’s future access to capacity would seemingly be a good thing. But there’s the rub. Will the ILS market be deep enough to handle losses that attach to their respective levels and then have the commitment to reestablish facilities during the renewal season?
Whether investors return with the same fervor of the past decade will depend in large part on Cat bond yield vs other credit markets and a continued appetite for this significant uncorrelated asset class. Over the past few years interest rate yields have been compressing in the Cat market but investors still purchased the bonds in light of low coupon rates on other credits. Interest rates are forecasted to remain low when compared to their historic norms, so investors will likely continue to view the ILS market as a possible alternative to the anemic yields otherwise associated with more traditional credit markets. Additionally, the events in Texas and Florida should push pricing up in both the traditional (re) insurance and ILS markets as well as the fully collateralized reinsurance market.
The traditional market is betting that ILS investors are not committed to this asset class. However, as Katrina showed, the ILS market is no longer in its nascent stage. The coming months and years will show whether the market is committed to providing the capacity that it claimed was at the core of this investment structure.
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