Insurance-linked securities (ILS) continue to grow in unexpected ways irrespective of recent major catastrophic events. In the past, ILS issuance spikes occurred immediately after large catastrophes, as witnessed post-Katrina/Rita/Wilma. However, even without significant events, the popularity of ILS has increased. What used to be an alternative to the hard-market pricing of traditional reinsurance is evolving into an integral part of overall reinsurance programs as cedents look for ways to diversify their overall risk management plan, lock in terms and conditions over multiple periods, and create access to long-term, stable capacity relatively unaffected by market cycle and systemic risk.
Intuitively, when reinsurers are strong and reinsurance is cheap, alternative sources of capital such as catastrophe bonds and other ILS structures may not seem necessary. However, although ILS issuance is expected to decline in the fourth quarter of 2008 compared to 2007, it remains at all-time-high levels. The up-front transaction costs and time spent bringing bonds to market require a commitment to longer-term strategic solutions as opposed to tactical responses to managing risk. Cedents should take advantage of the lower risk-transfer costs and other benefits of this alternative source of capacity.
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