ILS market growth comes when risk transfer needs are greatest: Pennay, Aon Securities

The surge in catastrophe bond market issuance and resulting insurance-linked securities (ILS) market growth over the last year, came at the right time for the insurance and reinsurance market, meeting their needs for risk transfer, according to Richard Pennay of Aon Securities.

Pennay, the CEO of Insurance-Linked Securities at broker Aon’s capital markets and ILS specialist unit, noted that the growth of the cat bond and ILS market has served to strengthen the resiliency of the global insurance and reinsurance market.

Highlighting record catastrophe bond issuance and the record returns investors have enjoyed through a period of relatively low catastrophe losses affecting the asset class, Pennay highlighted the record 18% expansion of the market’s capital base through the last year of record in Aon Securities latest annual ILS market report.

“The size of the market grew to $45.6 billion, nearly 18% greater than where it stood as of the last publication of this report,” he explained.

Adding that, “The market has benefited from capital inflows since early 2023,” while at the same time “Investors have benefited from wider risk margins while the diversification merits of insurance-linked securities continue to be clearly articulated to end allocators.”

Going on to say that, “The sector’s outperformance has also been well timed for insurers, reinsurers, corporates and governments: demand for additional ILS capacity has been unprecedented, as protection buyers contend with higher pricing in both the insurance and reinsurance markets.

“These dynamics combined to create an environment ripe for new issuance from Q4 2023 through Q2 2024.”

Pennay went on to explain the dynamic cat bond issuance environment, with more diverse offerings and new perils, as well as the introduction of cyber risk to the market, which he sees as a particular positive.

“The introduction of cyber risk to cat bond investors for the first time ever was a groundbreaking step forward for risk buyers and seekers, alike. This new frontier lays the foundation for further growth in the ILS market, driven by a peril anticipated to be of increasing concern to businesses globally for years to come,” Pennay said.

He noted that the widening of the scope of perils and geographies in the cat bond market has also served to increase the attractiveness of the market, to investors, while the “primary draw remains a lack of correlation to broader financial markets.”

Pennay stated, “The past 12 months can be characterized as a year of records, and the growth of the ILS market comes at a time when risk transfer needs are at their greatest. Inflation, evolving weather trends, and ambitious moves to close the protection gap have all driven demands for greater insurance and reinsurance capacity.”

He also noted that the growth of the market is meaningful to the industry as a whole, saying, “Those in need of protection have benefited from the expanding capital base of the ILS market, a market which has outpaced growth across all other corners of the insurance industry.”

Now more than ever, the investor base is recognising the benefits of the cat bond and ILS asset class, Pennay believes.

Saying that allocators have realised, “the substantial benefits of uncorrelated, consistent returns, strengthening the broader construction of their portfolios.”

“The growth in capital, driven by more diversified portfolios of risk on offer, serves to strengthen the resiliency of the insurance industry, an outcome we as industry stakeholders can all be proud of,” Pennay said.

Closing by saying, “Aon is supporting its clients in accessing record volumes of ILS capital, helping shape better risk transfer decisions while navigating volatility, building resilience, and pursuing profitable growth opportunities.”