1 week ago
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The catastrophe bond and insurance-linked securities (ILS) market is expected to see healthy demand from investors in 2025, but the firmness and trajectory of pricing in the sector, and more broadly in reinsurance, remains less certain, according to Mark Gibson of Schroders Capital.
With investors in cat bond and private ILS funds now looking set set for another year of attractive returns for full-year 2024, we spoke with Gibson, the Head of Products and Solutions Insurance Linked Securities at Schroders Capital, to explore the outlook for 2025 and get his views on the market drivers for the coming year.
Commenting on how 2024 has gone, Gibson explained that, “From a Schroders Capital point of view, the ILS market in 2024 YTD has been characterised by continuing attractive yields on a relative basis, coupled with limited impacts from wider wind and weather events.
“Yields benefited both from collateral return and still-attractive spread multiples, although the latter have seen some tightening as capital has flowed into the market.”
He went on to explain that, “From a risk perspective, our focus in recent years has been to move to a more remote attachment level, with a heavier weighting to occurrence than to aggregate trigger mechanisms. As a result, whilst 2024 was another above-average year for wind and weather-related losses, there was minimal impact on our portfolios.”
Looking ahead to 2025, Gibson is expecting another period of healthy demand for catastrophe bonds and private ILS, but feels that there is currently no clear picture on the outlook for pricing.
“It is difficult to provide a detailed outlook for 2025 given the large number of variables, some of which are beyond our control and could have a major impact, such as the occurrence of one or more large events. But we can make some general observations on broader market dynamics and how these could drive demand and pricing trends,” Gibson told us.
Going on to explain that, “The catastrophe bond market appears to be more in equilibrium than it was going into 2024. A large volume of maturities in the next three or four months, combined with retained earnings and inflows to managers, will result in healthy demand for paper. The primary pipeline appears to be fairly full and there has been some useful issuance on behalf of both new and repeat sponsors during Q4.
“However, it is not yet clear if the issuance already seen, and the volume of issuance anticipated during Q1 2025, will be greater than the available capital. If available capital exceeds primary issuance volume, then we may witness further spread tightening in addition to what we have seen during Q4 2024.
“On the other hand, if the pipeline is larger, and flows for longer, then spread levels may be a little firmer in Q1 than they are now.”
Schroders Capital also sources and allocates capital to opportunities in the private reinsurance market and here too Gibson feels there are potential capital pressures that may weigh on pricing dynamics.
Gibson said, “The private ILS market is even more closely reflective of what is going on in the traditional reinsurance market than is the catastrophe bond market. Whilst we have seen statements made by senior members of some large reinsurers in support of market discipline, meaning that there is not anticipated to be a reduction in pricing or a loosening in terms and conditions, increased capitalisation of the reinsurance industry as a result of retained earnings may lead to increased competition.
“During the current renewal season it seems that there is a limited amount of downward pressure on pricing, even for so-called peak perils, and a return to aggregate and other structures that respond to frequency, rather than just severity, of losses.”
Concluding that, “It is possible that protection buyers will respond to the more attractive terms and conditions by increasing the amount of protection that they buy.
“This could lead to an increase in the size of the ILS market, both public and private, and a more stable pricing environment. At the moment it is still too early to tell if this scenario will materialise.”
Read all of our interviews with ILS market and reinsurance sector professionals here.
English (US) ·