The insurance-linked securities market raised more than $1.1bn through non-life catastrophe bond issues in the first quarter of 2019, compared with an average of $1.8m over the most recent six first quarters. Compared to the most recent six first quarters, 1Q 2019 recorded the lowest issuance during the period and accounts for around a third of the record-breaking activity observed in 1Q 2018.

“We don’t believe the slowdown in issues we saw in the final quarter of 2018 and again in 1Q reflects any long term change in appetite for ILS risk from the capital markets, but understandably some investors are looking harder at the mechanics,” said Willis Towers Watson Securities managing director and head of ILS William Dubinsky.

In 1Q 2019, the ILS market ventured into new grounds through a number of private issuances such as Pool Re coming to the market with Baltic PCC which was the first terrorism reinsurance bond ever and only the second ILS deal to primarily cover terrorism risk.    

Meanwhile, the most commonly protected peril was windstorm losses with $450m of capacity dedicated to pure US wind peril and $550m to peak multi-peril coverage. An additional $50m of diversifying multi-peril protection was also issued including the initial frequency protection against weather-related perils.

At the same time, recent cases of loss creep have put actuarial models to the test. Investors unfamiliar with loss creep seem to have a better understanding and are likely to look closely at issuers’ records of timely and transparent loss reporting when making allocations in the future.

Current modelling methods are also being critically assessed given investors’ need for regular valuations. More consistent valuation approaches may spur substantial growth in ILS capacity as it would increase end-investors’ confidence in their evaluation of potential managers and support new allocations to the asset class.

“Data quality and accurate modelling are seen as essential and are under scrutiny, from the initial pricing throughout the life of a transaction. As ever, transparency is crucial, especially in post-loss reporting, which is becoming an important differentiator for cedants. The industry has realised it needed to raise its game and that effort is under way,” said Mr Dubinsky.