In these times of economic uncertainty, investors seeking diversity and liquidity have been turning to the ILS market, and as the capital flows in, insurers have been finding the spread more appealing too. Can the buoyant market keep going? And how much will ESG shape ILS in the future?

Natural disasters green

The first half of 2021 proved a record year for the ILS market. A record $5.6bn was issued in the second quarter, taking the full first half notional issuance to $8.5bn. Spreads were also 15-20 percent tighter than last year and closing in on highs not seen since 2018.

As the industry looks towards the full year the key questions are whether these issuances and spreads can be maintained.

A high volume of maturities in the first half played a role in the market’s performance, but Aon Securities CEO Paul Schultz says longer-term forces are just as important and will continue to drive the market in the near future.

“Over the last 18-24 months we’ve seen a gradual shift as investors wanted to deploy capital into liquid ILS strategies, so the supply of capital has been higher which has led to price tightening,” says Schultz.

“Cat bonds have come back for new or larger issuances, and we have attracted new issuers. That greater capital to deploy has led to price tightening across the market.”

Diversification of investment and the liquidity available in the ILS market has been a key appeal and new issuers are being drawn in. “We are noticing insurance companies that may have thought about ILS before, but the relative economics previously did not make sense, are now noticing where the pricing is, and are interested,” says Schultz.

Further underpinning hopes for continued growth in the second half of this year is the $3.7bn worth of ILS maturing in that period.

On the fundamentals Schultz is confident: “We are still at a price point that is interesting in comparison with traditional reinsurance. We expect this momentum to carry forward in 2022.”

The risk of natural disaster is, of course, the unknowable risk of ILS, and the first half of 2021 saw natural disaster losses reach a 10-year high. The largest of these stemmed from the extreme cold experienced in the US at the beginning of the year.

“From an ILS point of view, generally there is still a challenge for the market to get its arms around risks that appear to be climate change-related,” says Schultz.

So, can the ILS market be a part of the current environmental, social and governance (ESG) revolution – and could we see ‘green catastrophe bonds’?

Schultz is convinced the environment and the ILS market are fundamentally interlinked.

“ILS and ESG are joined at the hip,” he says. “There are a couple of components. The first is whether the collateral is invested in ESG-compliant securities. That is a straightforward question. The second and more complex component is the policies of the cedant. How much is their portfolio underwriting fossil fuels or other non-ESG-compliant activities? That is going to take a bit of time to sort itself out.”

The answer is likely to emerge from the market itself, Schultz says. “The motivation in the ILS market will be whether there is a real benefit in terms of price and capacity. If that happens then I think the ILS/ESG journey will accelerate.”

In 2021, the ILS market is riding the crest of a wave. In the longer term, climate change and the ESG agenda may be crucial factors in the market’s development.

“It’s early days,” says Schultz, “but when it comes to ESG, there is a great opportunity for ILS to take a lead.”

You can also view this article in the first weekly edition of #ReinsuranceMonth, which was published on 1 September by The Insurer and is available to download for free at