The ILS market is undergoing significant change amid growing investor interest in casualty and specialty-linked securities, delegates at the ILS Connect 2025 conference in London heard on Thursday.
Panellists on an Artex-sponsored roundtable discussed the outlook for the asset class and changing investor dynamics. They were speaking under Chatham House rules, which protect speakers’ identities on publication.
They agreed that investor appetite was healthy for both natural catastrophe and non-nat cat securities after two years of solid returns without major shocks. However, the pivot towards casualty was transforming the market.
“We’re at an inflection point,” one panellist said. “Before it was all about property cat and now it almost feels as if there isn’t a lot of interest in that other than among the people already investing in it. The interest now seems to be more towards casualty and specialty.
“It’s super-interesting timing for London Bridge and Lloyd’s to be pushing into this market,” the person added, referring to Lloyd’s risk transformation and insurance-linked securities platform.
Speaking from their own company’s perspective, another panellist noted the “material risk of capital impairment” that accompanies nat cat ILS.
“Plugging into great underwriting and a broader, diversified set of risks with strong counterparties in a partnership-style setup using ILS is the more interesting ground for us than the cat side,” the person added.
Part of the interest in casualty comes from investors looking for alternatives to the private credit market that are less correlated or uncorrelated with the broader economic environment, panellists said. The private credit sector has grown exponentially since the financial crisis and reached an estimated $1.5 trillion as of 2024, according to Morgan Stanley.
Interest in casualty is also fuelled by private credit investors who are looking for something other than life ILS, panellists noted.
“If you’re moving out of life into casualty, you’re transitioning from something with a 70-year tail to something that has a ten-year tail,” one panellist remarked. “That feels like a win.”
The person noted that the casualty ILS market had until recently been constrained by the long tail attached to the securities, compared with short-tail property cat, and investors’ reluctance to lock their capital away. However, the structures now increasingly available are alleviating those concerns.
“That’s where the joy of the Lloyd’s system and RITC (reinsurance to close) comes in,” the person said.
The same speaker mooted evergreen structures as a suitable way of meeting the needs of both cedants and investors within casualty ILS. Lloyd’s just-departed finance director Burkhard Keese previously highlighted its reinsurance-to-close mechanism as a means to develop an ILS market for casualty.
Overall, panellists agreed that there was significant interest in Lloyd’s, and that new investors were eyeing the ILS market heading into the mid-year renewals. Interest in Lloyd’s extends well beyond the London Bridge 2 platform, which had deployed $2.2bn of capital as of March.
“London Bridge is best for institutional capital but it’s not the only way to go if you’re happy with owning a corporate member,” one person said.
“There’s a growing optimism towards deploying in the sector, based on the last two years being in the main very good, and that’s both on the nat cat side and the non-nat cat side,” the person added.
In nat cat, they noted that pricing adequacy remained strong despite softening in some areas, while casualty was having “a good moment” rate-wise after a challenging five-year period through to 2019.
However, the upcoming North Atlantic hurricane season and uncertainty about the economic environment and inflation were the known unknowns.
Another speaker suggested that while ILS remained relatively attractive, the sector’s appeal had dimmed slightly.
“We’ve almost got to the sweet spot of very high risk-free rate on the collateral. Nat cat ILS rates have been gangbusters, certainly on the direct side, for a number of years. Every other asset class was incredibly expensive. Rates have definitely rolled off in the market – and who knows where the risk-free rate is going and what’s going on geopolitically– and certain asset classes are now less expensive than they were.”
One issue highlighted by panellists was a potential mismatch between supply and demand.
“In the cat bond space, there’s so much capital coming into the market. Will the supply of sponsors keep up? I always question that,” one asked. “You’ve also got private credit investors looking at casualty. Do we really need that capital in casualty? It’s going there but I don’t know what that does to that market.”
Another panellist suggested that insurers will continue to tap the capital markets to have optionality and bolster resilience.
“If your underlying book is growing, you require more cover. If there’s strong demand for that asset class then that drives pricing and although it has some disadvantage – with no reinstatement - it is multi-year cover in an environment where things look quite expensive.”
“On a three-year basis you have diversification of capital provider, you have got that multi-year cover, which enables you to write multi-year inputs. But you run the risk of that cover not being there as you haven’t got that reinstatement, so I think it’s got to be part of the overall solution. It’s by no means a silver bullet but it’s a very useful instrument as a sponsor to be able to use as part of that overall armoury.”
Touching briefly on the bigger question of the value of insurers owning a balance sheet at all, panellists said that cedants were looking strategically at the merits of managing other people’s capital and gaining fee income, compared with insuring purely from their own balance sheet.
One noted: “Insurers need to have some balance sheet involvement but also become a conduit through which other capital on a flexible basis can be deployed to help that cycle management. If you’re an insurer and you do pure ‘own balance sheet insurance’ and you’re an insurer that effectively manages other people’s capital, it’s the latter that has the higher multiple.”
