The Rise In Alternative Forms Of Reinsurance Capital

With ratings agency Fitch Ratings recently publishing an update of its methodology for rating insurance-linked securities (ILS), now is a good time to explore the rise of ILS from an unconventional form of risk transfer to the conventional method of transferring risk from insurers to the capital markets.

The rise in ILS structures began in 1992 when Hurricane Andrew made landfall in Florida causing billions of dollars in insured losses.

The resulting shortage of reinsurance capacity prompted investigations into new ways of transferring catastrophe risk outside the traditional reinsurance market, which was suffering from cost and capacity limitations. Insurers turned to the capital markets through the securitisation of natural catastrophe risk.