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The use of insurance-linked securities (ILS), catastrophe bonds and collateralized reinsurance has transformed the reinsurance market and conquered the property catastrophe space, according to S&P, providing companies with a lever to acquire premium growth while still managing and controlling their peak exposures.

In a new report rating agency Standard & Poor’s highlights the ability of the ILS market to bounce back from losses suffered in 2017 and the important role that alternative capital players in helping the global reinsurance market to trade forwards.

After an estimated $138 billion of losses in 2017, from hurricanes Harvey, Irma and Maria, as well as other global catastrophe loss events, S&P notes that, “there was more than enough inflow of alternative capital to renew coverage for cedants on Jan. 1, 2018.”

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Unsurprisingly, managing agencies in the Lloyd’s of London insurance and reinsurance market would like to see insurance-linked securities (ILS) as a permanent fixture and efficient capital options more readily accessible.

The Lloyd’s Market Association (LMA) polled senior executives from 25 managing agencies and found that support for ILS structures and ILS capital was high among the group, with many wanting easier access to ILS offerings within Lloyd’s.

In fact, 80% of Lloyd’s managing agents said that they would “like to see Insurance Linked Securities (ILS) products become a permanent fixture in the re/insurance market” according to the LMA’s survey response data.

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The heatwaves and the wildfires in the Northern Hemisphere in the summer of 2018 have put climate change at top of the agenda of media and politics. As we already see the adverse effects of rising temperatures, it is important to assess the impact on insurance-linked securities (ILS). In summary, the typical cat bond term of 3 – 5 years provides for continuous adjustments of pricing to encompass both climate effects and a globally increasing need for insurance. As ILS are an important mean to mitigate climate risks, we are likely to see more ILS solutions in the future.

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The amount of alternative capital in the global reinsurance industry, so capital provided by insurance-linked securities (ILS) funds, investors and structures, has now reached a new high of $95 billion and as a result contributes 16% of global reinsurance capital, according to Aon.

Alternative capital growth in reinsurance continues to outpace traditional reinsurance capital, with the amount of alternative capital counted by Aon’s capital markets unit Aon Securities growing by almost 7% during the first-quarter of 2018, from $89 billion at the start of 2018 to reach this new high of $95 billion at March 31st.

In the same quarter traditional reinsurance sector capital remained flat at $515 billion, reflecting the fact that growth in market share was seen as largest among the ILS funds and third-party capital vehicles at this time.

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The government of the United Kingdom is continuing to encourage other countries to look towards the UK and its recently enacted insurance-linked securities (ILS) regulatory and tax framework as a potential avenue for ILS and catastrophe bond issuance, with Brazil the latest country to be courted.

Ever since the enactment of the UK’s regulatory and tax framework for insurance-linked securities (ILS) and catastrophe bond issuance the government has been looking to attract attention to it and encourage other countries to consider the UK, if they or their insurance and reinsurance industry are considering ILS or cat bonds.

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A reader of this publication, the president of an insurance agency, recently wrote to say he kept hearing about catastrophe bonds but had little knowledge of what they were. He was curious if these instruments would replace traditional reinsurance and was particularly concerned about a scenario that would result in the catastrophe bond market’s collapse, resulting in widespread financial problems for primary insurers and economic calamity.

His timing was excellent. Catastrophe bonds, also known as cat bonds and insurance-linked securities (ILS), passed an important threshold in 2017, successfully weathering Hurricanes Harvey, Irma and Maria, three of the five costliest hurricanes in U.S. history. Altogether the storms produced $217 billion in damage-related costs, of which $92 billion was insured, according to Swiss Re’s research publication “sigma.”

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A number of industry-loss warranty (ILW) contracts providing retrocessional reinsurance are set to pay out after the latest updates to third-party data providers estimates of insurance industry losses caused by last year’s hurricane Irma.

At the beginning of July the industry loss estimate for hurricane Irma passed another key ILW trigger point we understand, resulting in a further hit to traditional and alternative or ILS fund capacity providers to some affected transactions.

We’re told that two triggers have actually been breached, a new high for hurricane Irma losses in Florida alone, as well as a new total across the U.S. and Caribbean, both of which could affect certain industry loss trigger reinsurance and retro contracts, including ILW’s.

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There are a number of new domiciles and jurisdictions for locating and housing insurance-linked securities (ILS) transactions coming into view, but they will all have to go through the thorough testing that is required to ensure their robustness and flexibility, before success can be guaranteed.

Only a decade ago there were very few places to think about locating an insurance-linked security (ILS) transaction, a catastrophe bond, or another type of collateralised reinsurance vehicle.

Now, new sponsors of ILS and collateralised reinsurance, as well as ILS fund managers, have a wealth of choices at their disposal, with different jurisdictions offering different levels of experience, flexibility and speed to market.

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Growing Climate and Disaster Risk

In 2017, impacts from natural disasters led to over $300 billion in estimated economic losses globally – more than double the amount for 2016. Economic setbacks of this scale can have devastating consequences for countries like Armenia, which is not only vulnerable to the effects of climate change but also to geological hazards such as large seismic risks.

Over the last few decades, urbanization and changing climactic conditions have quadrupled economic losses in Armenia, putting the country’s sustainable socioeconomic progress at risk. And, for the nearly 35% of the Armenian workforce who work in agriculture, the increasing severity and frequency of extreme weather events could destabilize livelihoods and push thousands into poverty. Such risks are already taking their toll on the country’s hard-won development gains. From 1994–2014, Armenia lost well over $1.5 billion to natural hazards like floods, earthquakes, and drought.

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As capital market investors increasingly look to access the relatively uncorrelated returns of insurance and reinsurance risk, their appetite is driving market expansion further into primary sources of insurance risk, with insurance now becoming a key area of growth for the ILS market.

“Insurance, in addition to reinsurance, is starting to become a growth area for ILS,” explains Willis Towers Watson Securities, the capital market unit of the insurance and reinsurance broker, in the firms latest ILS market report.

WTW Securities explains that the growing appetite for accessing insurance risk comes as ILS investors and ILS funds are trying to expand their assets under management, and realise that primary sources of risk provide significant potential for growth, especially if investors can stomach some risks beyond pure catastrophe exposures.

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