As the insurance-linked securities (ILS) market continues to grow, its role in addressing the widening protection gap is coming into sharper focus, with Holly Turner, Climate Specialist at Schroders Capital, suggesting that every ILS transaction can help address this goal.
The frequency and intensity of many different types of extreme weather events have been increasing.
According to WTW’s Natural Catastrophe Review 2024, estimates show that the insurance protection gap for natural catastrophes is around 60%,
While estimates from reinsurer Swiss Re show that global insured losses from natural catastrophes and extreme weather events reached around $140 billion in 2024. This marked the fifth consecutive year that it had exceeded $100 billion, with total economic damages also surpassing $320 billion demonstrating the protection gap that persists.
However, as the insurance protection gap continues to expand, Turner stresses that the ILS market can play an important role towards addressing it.
“The size of the ILS market today is approximately $115 billion – and it is likely to continue to grow to support the insurance industry and against the backdrop of the growing protection gap.”
“Certain ILS transactions have been launched to address exposures in less well-developed insurance markets. Specifically, several transactions have been brought to market sponsored by entities such as World Bank and Danish Red Cross, in contrast to more traditional ILS bonds that are sponsored by insurance companies,” Turner continued.
“Total amount of cover provided has been modest to date, but many further transactions are expected in the future.”
Turner, added: “Overall, however, one could argue that all ILS transactions, even in developed markets, help to address the protection gap.”
“When we consider the protection gap not just as a % difference between insured and uninsured losses but also as the total dollar loss amount, we not only need to consider the increased frequency and severity of weather events but also the increase in economic exposure within vulnerable areas.
“This is particularly prevalent within developed markets, in coastal regions and areas prone to flooding. This is contributing to the increase in overall losses from natural catastrophe, with a projected trend of 5-7% annual growth.”
Moving forward, Turner provides some examples of previous ILS transactions that have effectively tackled different protection gap drivers.
One example is the IBRD – Chile 2023 parametric earthquake catastrophe bond, that provides disaster insurance to the Republic of Chile, a less-developed country, issued through the World Bank’s International Bank for Reconstruction and Development (IBRD).
As highlighted by Turner, the proceeds from the sale of the notes to ILS investors were used by the IBRD to fund sustainable development projects in member countries, while it entered into an insurance agreement with Chile to make the payouts on the occurrence of any qualifying quakes.
Turner also flagged the $1.525 billion Everglades Re II Ltd. (Series 2025-1) catastrophe bond that was secured in May this year by Florida Citizens Property Insurance Corporation, which provides the firm with a substantial amount of named storm reinsurance protection.
“Florida’s Citizens Property Insurance Corporation is a not-for-profit insurer of last resort designed to provide insurance for homeowners who can’t obtain cover from the private insurance market. It relies on support from the traditional reinsurance and ILS markets in order to be able to offer insurance policies to homeowners in Florida. Without this it would not have the capital to be able to offer the cover that it does.
“The ILS market steps up to provide capacity each time this sponsor comes to market. The issuance size makes it one of the biggest individual issuances,” Turner explained.
As a reminder, you can view details of more than 1,000 other cat bond issuances in the extensive Artemis Deal Directory.
Turner goes on to note that climate adaptation and resilience remains largely untapped by most private investors, however with rising demand being seen for solutions related to the increase in extreme weather events and longer-term climate changes, increased opportunities are coming to market.
“Within private equity, broadly two types of opportunities exist: early-stage investments into pure-play companies focused on specific climate adaptation solutions and technologies, or buyout and growth investments for large diversified players. Opportunities will also vary considerably by geography, given the level of funding, existing resilience, underappreciation of climate risks and localised nature of climate impacts,” Turner explained.
Adding: “Understanding climate risk remains a critical first step to improving resilience against extreme weather events, and can be achieved by improving the climate data, analytics and modelling available. Areas with less climate data collection and modelling can be one reason for a market becoming underserved by insurance.”
