ILS Market Grows as Reinsurance Softens
Moody's Ratings reports the insurance-linked securities market is expanding despite a softer reinsurance environment, driven by record catastrophe bond issuance.
Moody's Ratings reports the insurance-linked securities market is expanding despite a softer reinsurance environment, supported by strong investor demand and record catastrophe bond issuance. The rating agency states that insurers and reinsurers are using ILS more strategically in a competitive market.
Citing data from broker Aon, Moody's reports that ILS capital in the global reinsurance market reached $144.5 billion by mid-2026. The rating agency says this half-year period reaffirmed the ILS market as a deep and resilient source of insurance risk capital.
Market Expansion and Strategic Shifts
Growth has been fueled by record catastrophe bond issuance in the first half of 2026. A record number of first-time sponsors entered the cat bond market during this period. Moody's notes that many cedants renewing maturing bonds also increased their protection.
"Many cedants renewing maturing bonds also increased their protection, in a sign that they are moving larger shares of their risk transfer programs to the capital markets, in part to lock in the current softer pricing and hedge against future price increases," says Moody's.
Alongside cat bonds, Moody's highlights Aon's estimate that reinsurance sidecars grew to roughly $23 billion of outstanding investments. This reflects growth of around 50% since the end of 2024. The agency describes these trends as a structural shift, with carriers selecting the most appropriate and cost-effective source of capacity for each risk.
Pricing and Returns in a Soft Market
Softening reinsurance market conditions are altering ILS economics. Ample capacity and a relative lack of large industry losses are weighing on traditional reinsurance pricing and catastrophe bond spreads. The Guy Carpenter US Property Catastrophe Rate-on-Line Index declined by about 16% over the 2026 renewals.
This leaves pricing around 22% below the hard market peak in 2024, though rates remain above the previous soft market low. Cat bond spreads have followed the traditional market lower since early 2024. Moody's states this is driven in part by record inflows competing for risk as the average expected loss of new issuance moved higher.
Pricing compression has been sharpest on remote tail-risk layers and less so on lower, higher-frequency layers where the risk of loss is higher. Despite falling spreads, Moody's believes the asset class continues to generate good returns for investors. The agency highlights the Swiss Re Global Cat Bond Index, which returned 11.4% in 2025 and 4.1% in the first half of 2026.
| Metric | 2025 Return | H1 2026 Return |
|---|---|---|
| Swiss Re Global Cat Bond Index | 11.4% | 4.1% |
"For sponsors, ILS retains clear appeal through pricing that is very competitive with traditional reinsurance, multi-year pricing certainty, diversified capital and collateralized protection," says Moody's.
Evolving Risk and Innovation
Investors are now committing more capital to structures with a higher underlying risk of loss. This includes aggregate covers, frequency protections, and secondary perils, driven by moderating ILS pricing as they seek stronger returns. At the same time, innovation is broadening the scope of capital market solutions.
The growth of sidecars and other structures introduces new risk considerations. Asset-intensive life reinsurance sidecars have expanded quickly as life insurers partner with asset managers to support long-dated annuity liabilities. Moody's notes these carry significant asset risk, since higher-yielding and often less liquid assets back the liabilities.
On the property and casualty side, sidecars increasingly support managing general agent-originated business. Moody's points out that underwriting quality is harder to assess here due to limited operating histories and sparse public disclosure. Such vehicles often reach beyond property catastrophe into risks that are less standardized and harder to model, including longer-tail casualty lines.
