Insurance-linked securities are a growing part of the alternative risk transfer universe as primary policyholders set up structures to access the market, which also benefited from a strong showing after the 2017 catastrophe season, observers say.

“2017 helped demonstrate to both existing and potential capital market clients that alternative capital is sustainable even when faced with significant catastrophe events,” said Jenise Klein, New York-based managing director for Allianz Global Corporate & Specialty SE’s alternative risk transfer unit, adding that investors had not fled the market. “I think everybody saw it as a positive test of the system.”

“2017 was the year that provided the proof of concept for the insurance-linked security as a structure,” said Michael Gruetzmacher, Aon PLC’s managing director of the brokerage’s alternative risk solutions team in Chicago. “It demonstrated that capital markets are here to stay and that they can withstand losses, and the whole system works as designed.”

Insurance-linked securities, which can be structured on an indemnity basis — where they respond to specific losses — or a parametric basis — where they are triggered by an index-linked event — have seen expansion in participants and geographically.

“Public entities have had a fluctuating presence, but we expect that to grow as concerns about resilience and sustainability assume a more public profile,” said Oliver J. Horbelt, head of capital partners, reinsurance division, for Munich Reinsurance America Inc.

in New York. “The recent cat bond undertakings of the World Bank on behalf of several member countries is an indication of this trend. Other public entities have issued cat bonds or purchased parametric insurance covers.” The FloodSmart Re $500 million Series 2018-1 Notes on behalf of the Federal Emergency Management Agency’s National Flood Insurance Program secured $500 million in flood reinsurance cover for three years. This was the agency’s first use of a catastrophe bond and only its third reinsurance placement to date.

Jennifer Hills, director of the office of risk management services for the King County Department of Executive Services in Washington state, said that after hearing a presentation on the parametric insurance purchased by New York’s Metropolitan Transit Authority in the wake of Superstorm Sandy — the MetroCat Re Ltd. Series 20131, which offers $200 million for three years against storm surge — she became more interested in such structures. “I saw that other public entities were purchasing parametric coverage and became interested,” she said.

The market is also expanding to new regions The first half of 2018 featured French reinsurer Scor SE’s Atlas Capital UK 2018 as the first deal to be domiciled in the U.K. and take advantage of the new London insurance-linked securities regulatory regime; and

Singapore this year introduced a program to offset much of the upfront costs associated with issuing insurance-linked securities.