For the insurance industry, 2016 was dominated by a multitude of medium-sized events which were costly, but only a few of them were severe enough to trigger the pay-out of a catastrophe reinsurance program (for example, the wildfires in Fort McMurray in Canada, hurricane Matthew or the strong earthquake in New Zealand). Thus, whilst the overall loss burden was quite high, the majority of these losses were retained by primary insurers in the individual local markets.
As a consequence, many insurers (and reinsurers) reported negative results despite the absence of actual large catastrophe events. In contrast, the ILS market, which traditionally focuses on the most extreme events, has only picked up a small portion of the overall losses in 2016 and virtually all ILS managers were able to report positive results.
At the moment, ILS markets already supply about a fifth of the USD 400bn global catastrophe market capacity. Given the increased look at credit risk by regulators worldwide, the ILS market has the potential to double in size within a reasonable amount of time. This development is fueled by new solvency regimes such as Solvency II in Europe, which has already started to trigger a significant pick-up in demand.
Author: Siti Dawson, Product Specialist, LGT ILS Partners AG