ILS and reinsurance are collaborating more closely: Wong-Fupuy, AM Best

Third-party capital in the reinsurance market surged to a record high in 2024, reaching approximately $107 billion by year-end, as estimated by broker Guy Carpenter and rating agency AM Best. This growth was primarily fueled by the expanding insurance-linked securities (ILS) market, which remains a major component of third-party capital in reinsurance.

AM Best recently held a webinar featuring key industry figures who shared insights on the 1/1 renewals and projected market trends for 2025. During the session, Carlos Wong-Fupuy, Senior Director at AM Best, highlighted the significant role of third-party capital in driving reinsurance capacity and influencing pricing dynamics, with ILS playing a central part.

Wong-Fupuy noted that while ILS was previously viewed as a competitor to traditional capital, the landscape has shifted towards a more collaborative approach. Many large-rated balance sheets now operate their own ILS platforms, allowing them to flexibly allocate risks based on market appetite. This integration has contributed to the notable increase in ILS capacity, particularly from affiliated ILS funds.

A recent AM Best report further underscored how ILS capital expanded in 2024, driven largely by investors reinvesting their earnings back into the market, boosting available ILS capacity.

Addressing the hardening property reinsurance market, Wong-Fupuy remarked on its impact on investor sentiment heading into 2025. He highlighted that despite ongoing challenges, ILS investments have consistently delivered strong double-digit returns, often exceeding 20% in recent years. Even as projections for the next couple of years suggest returns around 15% to 17%, investors remain cautious, recognizing that these high returns may not persist indefinitely, especially amid a higher interest rate environment.

Wong-Fupuy also emphasized the importance of managing investor expectations while deploying capital efficiently. He noted that although ILS has demonstrated impressive returns, investors may also consider lower-risk alternatives offering competitive yields, making it crucial for the sector to strike a balance between capital deployment and investor confidence.