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

Third-party capital in the reinsurance market soared to record levels in 2024, with broker Guy Carpenter and rating agency AM Best estimating it reached an impressive $107 billion by year-end. A major factor behind this growth is the expansion of the insurance-linked securities (ILS) market, which remains the dominant component of third-party capital in reinsurance.

During a recent AM Best webinar, key industry figures shared their insights on the 1/1 renewals and expectations for 2025. Carlos Wong-Fupuy, senior director at AM Best, highlighted the record-breaking performance of third-party capital in 2024 and underscored ILS’s role in reshaping reinsurance capacity and pricing.

Reflecting on the evolution of ILS, Wong-Fupuy noted, “A decade ago, ILS was seen as a significant competitor to traditional capital. Today, the two are increasingly converging and working together.” He pointed out that much of the recent ILS capacity growth stems from affiliated ILS funds, with many large-rated balance sheets now incorporating ILS platforms. This allows companies to structure their offerings around ILS capacity, enabling them to strategically reallocate risk based on market conditions.

An AM Best report further highlighted how ILS capital expanded in 2024, fueled by investors reinvesting their earnings, which, in turn, boosted deployable ILS capacity.

Discussing the impact of the hardening property reinsurance market on investor sentiment for 2025, Wong-Fupuy observed that ILS investors have been reinvesting returns, with the sector generating double-digit returns—often exceeding 20%—in recent years. While projections suggest returns may moderate to around 15%–17% over the next couple of years, he emphasized the risk premium investors are factoring in and noted that current high interest rates also influence investment decisions.

He concluded by stressing the importance of balancing capital deployment with investor expectations. “While high returns in this sector are achievable, investors also consider opportunity costs, as alternative lower-risk investments may offer similarly strong returns.”