The issuance of insurance-related securities declined as the COVID-19 pandemic hit the markets earlier this year, but interest in non-traditional reinsurance mechanisms has since increased as investors continue to be attracted by investment funds that allow them to diversify their portfolios. .
Although established ILS products offer investors investment opportunities that are not closely correlated with the regular financial markets, some later ILS structures are not that far away, experts say.
In addition, they say equity volatility and fixed income markets have in some cases distracted investors from ILS products, which include disaster bonds and other securitized products.
The ILS market, from a new issue point of view, "closed for a few weeks in March and April," according to Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC. However, the market saw "good levels in the second quarter despite the COVID-1
"Valuation and trading levels were down slightly but had higher value than other asset classes," Schultz said.  The disaster bond market took a "small break" when COVID-19 spread globally, causing widespread economic disruption in March and April, but has since gone "like gangbusters," said Jeff Mohrenweiser, senior director at Fitch Ratings Inc. in Chicago.
The $ 6.6 billion new issue in emergency bonds in the first half of the year exceeded the $ 4.7 billion issued for the whole of 2019, Mohrenweiser said. For the entire ILS sector, the total outstanding amounts to $ 29.7 billion.
ILS products, which first began to appear about 25 years ago, are used by insurance companies and reinsurance companies as a way to access the capital markets for reinsurance and non-return reinsurance capacity. of the traditional reinsurance markets.
One area of recent growth in catastrophe bond issuance has been among mortgage lenders, says Mohrenweiser, while technical insurance-related securities are more correlated with financial markets than other ILS products.
"It violates ILS's mandate to be a diversifier from other fixed-income assets, as when the US economy falters, the risk of mortgage insurance escalates. It is much more correlated to the economy, he said.
Investors may have been monitored by the closer link.
"As we have seen with (mortgage insurance bonds), correlations tend to converge when there are these extreme events," says Brian Schneider, senior director of Fitch Ratings in Chicago. "Investors did not expect a strong link between the pandemic situation, which is usually considered a type of life insurance."
Disaster Risks Like Hurricanes "You would still see so strongly regardless of the economic situation," Schneider said.
"The non-correlation you get from hurricanes and earthquakes is not necessarily true in pandemic scenarios," said Philipp Kusche, New York-based global head of ILS and Capital Solutions for TigerRisk Partners Inc.
The pandemic has also shaken investors when the markets whipped and drew attention from the insurance capital markets, said Kusche.
"Investors are distracted and worried about other markets such as fixed income and equities," says Kusche. "They see interesting opportunities in other markets and are less focused on the insurance linked the securities market. "
The stability of the ILS market has in some cases led traders to look for profits elsewhere, according to a recently published report from Switzerland. Re Ltd.
“Secondary market sales, largely caused by units such as several strategic asset managers see opportunities in other markets, selling cat bonds with stable valuations compared to other asset classes at discounts at face value, "said the report in August
One cat band directly affected by the pandemic was the World Bank's Pandemic Catastrophe Bond, part of the institution's Pandemic Emergency Financing Facility The total risk transferred to the market through the bonds and derivatives is $ 425 million.
COVID-19 is one of the viruses covered by the Pandemic Emergency Financing Facility, according to a World Bank fact sheet.
April 17 AIR Worldwide, which tracks COVID-19 for the bond, reported that the virus had infected everyone necessary activation criteria including outbreak size, spread and growth, ”said the World Bank.
On April 27, the Pandemic Emergency Financing Facility announced the allocation of $ 195.84 million to 64 of the world's poorest countries with reported cases of COVID-19. As of July 27, $ 146.5 million of the $ 195.84 million had been transferred to support COVID-19 responses in 48 countries.
The size of the losses for investors in the World Bank's pandemic bond may affect the pricing of similar future bonds.
"I expect investors' appetite to be somewhat limited for pandemic risk," Kusche said, adding that a pandemic bond would be more correlated with market risk than investing in a hurricane bond.
Despite market hiccups and others before it, Schultz sees the market enduring.
"The ILS market has shown a lot of resilience," he said, including tests such as Hurricane Katrina, the financial crises and losses of 2017. "It shows investors this is a sustainable and resilient market."