Insurance-linked securities market
The value of an insurance-linked security (or ILS) depends on loss events. ILS performance correlates slightly with financial markets, and this provides investors with scope in diversifying their traditional portfolios.
The ILS market developed in the aftermath of Hurricane Andrew in 1992. As of 3Q14, the market had grown to around $60 billion.
The last three years have seen collateralized reinsurance (or col re) grow as a source of alternative capital. The current capacity of col re is close to $30 billion, showing a 25% increase since the end of 2013. Meanwhile, outstanding catastrophe bonds have remained below $25 billion.
Reinsurance sidecars and insurance-linked warrants (or ILW) grew by 50% and 100%, respectively. The overall capacity contribution of these smaller sources of capital remained low.
Catastrophe bond issuances
2014 was a stellar year for catastrophe bond issuances. Issuances in 1H14 hit a record high at $5.9 billion. Compared to this, issuances remained muted in 2H14 with a value of $2.3 billion. Overall issuance was at $8.2 billion, which was slightly shy of the record high issuance of ~$8.4 billion in 2007.
If you are interested in gaining exposure to the insurance sector, consider investing in funds like the iShares US Financial ETF (IYF) and the Financial Select Sector SPDR ETF (XLF).
For the latest updates on the insurance sector, please visit Market Realist’s insurance page.