Insurance-linked securities set for continued growth, says ILS

Since its inception in 1996 the insurance-linked securities market has witnessed worldwide issuance of $38bn and has more than remained stable throughout the credit crunch, said Ian Evans, director of ILS Today.

According to AM Best, the catastrophe bond market grew from $1.99bn to $4.69bn between 2005 and 2006, and Swiss Re predict that the wider ILS market will follow suit by growing to $1trln over the next decade.

Rodrigo Araya of Moody’s Investors Service said: “The market has grown at a scorching pace in the last three years. We will probably see about $8bn in new issuance this year”.

Evans added: “Investors are attracted to ILS because they offer an investment that is not directly correlated to fluctuations in the wider financial markets. They have been largely unaffected by the collapse of the subprime markets which has allowed the ILS market to continue to grow over the summer.”

Evans predicted that with the introduction of Solvency II, expected in 2012, the market will continue to grow.

Talking about Solvency II, Rick Watson, managing director of the European Securitisation Forum said: “The new directive says that you can now use not only reinsurance but also securitisation and derivatives to mitigate liability risks for life and non-life. The new legislation allows for insurance companies to use the transfer of risk onto the capital markets as a tool to reduce their regulatory capital requirements, which previously was not permitted. This will encourage continued rapid growth in the sector as more new risks are securitised”.

“Solvency II presents insurers with a series of choices and challenges and it is crucial to prepare now in order to be among those who benefit from the new regime. Those who grasp the opportunity will gain competitive advantage over those who don’t,” added Evans.

ILS is holding a summit to discuss some of these issues: The European ILS and Cat Bond Summit 2008 will take place on 7-8 February.