A record issuance of insurance-linked securities is expected to continue as reinsurers tap the capital markets to utilise catastrophe bonds to manage risks amid a firm reinsurance cycle, according to Fitch.

The ratings agency added that this would provide ILS investors with superior total returns, diversification to other assets and a lower risk profile.

Fitch said that traditional reinsurers had increasingly utilised the ILS market to backfill unmet property risk needs and diversify counterparty exposure.

“We expect year-to-date 2024 cat bond issuance of $13 billion to surpass 2023’s record issuance of $16 billion,” said the agency. “However, with nearly $48 billion outstanding, cat bonds represent less than 10 per cent of the total reinsurance market.”

It added: “Similar to the traditional reinsurance market, prices for reinsurers to issue bonds have risen meaningfully, with underlying risk spreads in the 6 per cent to 8 per cent range in 2024 to eliminate cat-related risks.

“Sponsors also face higher administrative, legal and bookrunning expenses not associated with dealing with reinsurers directly. Investor demand, while improving, is not yet meaningful enough to spur price competition and reduce risk spreads.”