Prevailing market conditions have enabled the insurance-linked securities market to secure advantageous terms and conditions for renewed and new programmes, leading to a significant increase in yields for funds as well as catastrophe bonds, according to a new AM Best report.

The Best’s Market Segment Report, Cat Bonds Lift a Muted ILS Market, is part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo.

The report said that catastrophe bond issuance in first-half 2023 reached a record of approximately $9.7 billion, which already surpasses the total for 2022.

The size of the cat bond market has grown consistently for the last five years and remains one of the bright spots in the ILS market.

This has helped to lift overall ILS market capacity by approximately $3 billion since the beginning of the year to approximately $99 billion, as estimated by AM Best in conjunction with Guy Carpenter.

At the same time, net capacity provided by the ILS market is lower than $99 billion due to an unknown amount of trapped capital, and despite the prospect of higher returns, capital formation remains tepid due to a number of factors.

Wai Tang, senior director, insurance-linked securities, AM Best, said: “The dearth of capital injections into the reinsurance market and the resulting supply shortfall has meant that many insurers were unable to fill their requested covers from reinsurers except at exorbitant prices during the year.”

Dr Tang added: “At year end, the cat bond and collateralised reinsurance markets may be met with pent-up demand for reinsurance cover among cedents that didn’t have room in their budgets to purchase as much reinsurance coverage as they would have liked at the January or July 2023 renewal periods.”

AM Best expects the ILS market to remain hard if heightened cedent demand for capacity is met with overall reinsurance capital levels that are relatively flat.

Emmanuel Modu, managing director, insurance-linked securities, AM Best said: “Whether higher returns posted by the ILS asset class begin to attract additional capital remains an open question.

“Industry observers have noted that ILS investors are likely focused on other, more familiar asset classes that offer higher expected returns with greater liquidity and perhaps less volatility.”