Reinsurers are likely to increase their use of insurance-linked securities (ILS) as part of retrocession programs amid rising catastrophe losses and as emerging risks become more of a focus, S&P Global Ratings says.

Mid-size reinsurers in particular have steadily increased use of third-party capital, allowing them to increase market share and take on more catastrophe risk, while smaller reinsurers are less inclined to use the option.

The ILS capital market share may also increase over the next few years as innovative issuances address emerging risks related to cyber and climate change as well as environmental, social and governance issues, S&P says in a report.

“In our view, the ILS market will continue to play an important role for reinsurers,” S&P says.

“The more peak exposures the reinsurance market transfers to a broad range of ILS investors, the better for the stability of the system and the growth of the market.”

ILS arrangements include catastrophe bonds, sidecars, collateralised reinsurance and industry loss warranties.

S&P says natural catastrophe losses this year are likely to exceed reinsurers’ budgets for a fifth consecutive year, putting further pressure on rates, with increases expected at upcoming renewals.

Investor interest in the ILS asset class is likely to remain strong as long as the market stays disciplined, with investors looking for good performance without adverse loss development, understanding of climate change-related risks and transparent and timely communication.

“If the ILS market can deliver this, we might just be at the cusp of another growth spurt for the market,” S&P says.

ILS capital has expanded $US3 billion ($4 billion) to $US97 billion ($128.9 billion) year to date from a recent low of $US94 billion ($124.9 billion) last year, according to Aon data cited in the report.