2025 is shaping up to be a pivotal year for the insurance-linked securities (ILS) sector, with growing investor appetite for securitized casualty risk, according to executives from reinsurance broker Gallagher Re, with Andrew Newman saying it is a “game changer” for the ILS market.
Traditionally, catastrophe bonds have dominated the ILS space thanks to their liquidity and short-tail nature, while casualty risk exposures often stretch over a longer period.
“I think the point I was making is that 2025 will be a year in which we securitize casualty business. And the cat bond market has been appealing to investors because it’s liquid and because it has a short tail. And so, the perceived duration of the exposures, the amount of time you’re tying up cash in a bond instrument is quite short,” Newman said.
He continued “What’s interesting about the market’s ability to securitize casualty risk is the durations need to be longer. And that was always a dilemma between sponsors, so clients who were looking to securitize casualty risk, and investors who looking at cat and saying, well, why would I want to participate on cat business for more than 12 months or 18 months?
“We’re now seeing some pools of capital looking at indefinite periods of time. And so, the investor appetite for longer duration exposures is a game changer.”
Moreover, Newman also pointed to global macroeconomic factors that are shaping investor interest.
The executive highlighted how higher interest rates since the Russia-Ukraine conflict have transformed casualty economics. With liabilities averaging five to six years, the potential returns at today’s rates are more attractive than they were when interest rates were lower.
Lara Mowery, Chief Commercial Officer at Gallagher Re, noted that higher rates have improved comfort levels for investors entering less standardised areas of risk.
“The other aspect of that is when you have those emerging dynamics, and that interest rate shift was a was a big one, it does help to give the investor a greater level of comfort around something that isn’t as modellable, or doesn’t necessarily have as accepted a framework for risk modeling as property does.
“That’s what’s always made the ILS space a very comfortable place with property, because you have very standard measures of risk, whereas casualty is a bit more wild west,” Mowery explained.
Furthermore, Newman emphasized how new structures, such as casualty sidecars, are increasingly being seen as alternatives to traditional reinsurance.
“So, I think the securitization of casualty is a game changer. Some of us were involved in cat bonds for motor insurers, there have been casualty cat bonds. But these sidecars that are being put together are securitizing casualties with long duration exposures, which makes them an alternative to reinsurance,” he explained.
“And the interesting thing about the two sources of capital is that investors or alternative capital looks at these instruments as an internal rate of return, including investment income.”
Newman concluded: “The insurance industry has been reluctant to want to share investment income, it wants to either keep the investment income or avoid the dark days of cash flow underwriting. People my age will remember. But I think what cedents like, what sponsors like, is the fact that they’re dealing with reinsurers. They’re completely transparent about investment income, completely transparent about return, and in a rising interest rate environment, in an improving pricing market, that’s attractive.”
Also read: No surprise if 2026 is the fourth consecutive year of record cat bond issuance: Newman, Gallagher Re
