The rising importance of insurance linked securities in the insurance sector

Over the last 25 years, approximately U.S. $177 billion of Insurance Linked Securities (ILS) were successfully issued, with the majority being domiciled in Bermuda. Issuances in January 2025 alone exceeded U.S. $500 million. Ocorian’s Crystal Worrell and Sherman Taylor explore the growing significance of ILS to the insurance market below. 

Insurance is a force for good in the world that allows covered communities, businesses and individuals to recover when faced with insured losses. For instance, the leading catastrophe modellers estimate that the recent Los Angeles wildfires could result in as much as U.S $40 billion of losses, and insurance will be critical in funding the city’s recovery.

Collateral is the lifeblood of insurance, traditionally provided by reinsurers. However, over the last 25 years, we have seen steadily increasing use of ILS as a new source of collateral, with billions of risks being transferred to the capital markets annually. In 2000, there were 12 known ILS deals completed, while in 2024, there were 93, representing a 775% increase over the period.  

There are 3 main factors driving the insurance market to look for new sources of capital. Firstly, the frequency and severity of loss events have increased. Between 2023 and 2024, there were 55 individual weather and climate disasters with at least U.S $1 billion in damages in the United States alone. Secondly, capital is required to cover newly emerging risks such as cyber security risks. Lastly, the availability of capital has a direct impact on the price of insurance coverage, which has been a challenge for the market in recent years. 

ILS has enhanced capacity and improved financial strength and stability for cedants. Its impact is no longer limited to catastrophe risks as it was in the past, hence, there has been a shift away from the use of the term “cat bonds”. 

On the investor side, ILS has grown from an “alternative investment” to a more traditional asset class that frequently appears on the balance sheets of pension funds, hedge funds and specialised ILS funds. Technology innovations and improved availability of data have allowed investors to make more informed investment decisions on ILS allocations in their portfolios.

ILS is the best of both worlds because it offers investors a security uncorrelated to equity markets, broadening investment options, while simultaneously reducing insurers’ reliance on traditional reinsurance. This evolution has led to more competitive pricing with the introduction of more capital, improved risk management, and more resilience for the global insurance market. ILS has helped the insurance sector to recover and re-capitalise more readily following significant loss events.

Another notable innovation in insurance has been the increased use of parametric triggers, which, although not exclusive to ILS, has become a feature of many ILS deals, such as the U.S. $595 million IBRD CAR Mexico 2024 (Pacific) deal issued in May 2024, which offered insurance coverage for losses related to named storms in the Pacific region. This demonstrates both the versatility and the innovation of ILS. Due to their pre-defined objective measures, parametric triggers are good for ILS, improving the timeliness of payouts, and offering more transparency. 

Expanding from its roots in property catastrophic risks such as storms, hurricanes and earthquakes, ILS has revolutionised coverage, now catering to rapidly evolving risks and providing solutions for complex global needs. ILS helps to close protection gaps related to wildfire, mortgage default risks, life & health, terrorism and cyber events. 

As an alternative risk protection and financing vessel, ILS serves a very broad insurance market and has been recognised and supported by global financial institutions such as the World Bank, US Agency for International Development and Global Risk Financing Facility as a risk transfer option and a source of global capital for governments of low and middle-income countries. In 2021, Jamaica issued its first catastrophe bond, with the support of donor funding for payment of premiums. In 2024, the country successfully renewed its U.S. $150 million issuance, paying for protection out of its own funds and backed by 15 global investors geographically positioned in the U.S., Europe, Bermuda, Asia and Australia. With the support of the World Bank, other small developing nations continue to explore similar risk transfer options, demonstrating the growing popularity of ILS worldwide. 

ILS has withstood the test of time and is the most significant new development in insurance in a quarter of a century. It is now a mainstay of both the insurance and capital markets and will continue growing into the foreseeable future.    

Learn more about Ocorian’s ILS services here.