The insurance-linked securities market accounts for approximately $35 billion in alternative reinsurance capacity and comprises structures including catastrophe bonds, collateralized reinsurance, sidecars and industry loss warranties, according to a new study from Conning.

The ILS market continues to evolve, with new product structures and increased flexibility for issuers. And, the investor base continues to expand as the asset class becomes more widely accepted as a low-correlating, attractive alternative investment. These changes are having an impact on reinsurers, according to the study, “Insurance-Linked Securities: As Alternative Risk Transfer Goes Mainstream, the Reinsurer Business Model is Changing.”

“The insurance-linked securities market has become increasingly attractive to both investors and reinsurers,” said Steve Webersen, managing director at Conning. “Investors are attracted to these non-correlated diversifying investments and the historical returns the asset class has delivered. Reinsurers, meanwhile, have recognized that this market is here to stay, and are extending their business models to establish relationships with ILS funds and develop their own internal capabilities.”

Among the ILS products, Conning contends growth prospects are strongest for collateralized reinsurance and sidecars, mainly due to their flexibility and broader appeal. “While additional perils can be appropriate for ILS structures, we continue to see the greatest interest in peak perils such as U.S. wind and earthquake exposures,” the report states.

A challenge for reinsurers is additional capital that will create downward pressure on prices and ultimately lower returns. “It is clear that the ups and downs of reinsurance pricing have dampened in recent years, and we believe that has much to do with the growth in alternative capital sources,” the report states. “We see a continued convergence, or maybe a clash of cultures, between the capital markets and the traditional reinsurance market. Both these markets have distinct roles to play; however, the convergence will come with some healthy competition.”

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