Hurricanes will contribute to keeping ILS spreads historically high: Schroders Capital CIO Rode from

Hurricanes to Drive ILS Spreads to Record Highs

Schroders Capital CIO Rode Weighs In

In-depth analysis of the impact of hurricanes on insurance-linked securities (ILS) spreads

The recent intensification of hurricane activity is poised to exert a significant influence on the insurance-linked securities (ILS) market. According to Schroders Capital CIO Klaus Rode, the impact of these storms will likely contribute to historically high ILS spreads.

ILS, which include catastrophe bonds and other instruments, provide investors with exposure to insurance risks. As a result of the increased likelihood of catastrophic events due to climate change, demand for ILS has surged in recent years. However, the recent spate of hurricanes has raised concerns about the potential for losses, leading to a widening of ILS spreads.

Rode highlights the fact that the frequency and severity of hurricanes have increased in recent years, a trend that is expected to continue. This increase in risk is reflected in the pricing of ILS, as investors demand higher returns to compensate for the elevated risk of losses.

The impact of hurricanes on ILS spreads is multifaceted. Firstly, the occurrence of a major hurricane can lead to significant losses for ILS investors, eroding the value of their investments. Secondly, the fear of future losses can lead to a sell-off of ILS, further driving up spreads. Thirdly, the increased demand for ILS due to the rising risk of catastrophic events can also contribute to higher spreads, as investors seek to capture higher returns.

Rode emphasizes that the impact of hurricanes on ILS spreads is likely to be long-lasting. The elevated risk of catastrophic events will continue to weigh on the market, leading to sustained high spreads. This will make it more challenging for ILS investors to generate attractive returns, and may lead to a reassessment of the risk-return profile of these investments.

In conclusion, the recent intensification of hurricane activity is having a significant impact on the ILS market. The increased risk of catastrophic events is driving up ILS spreads, and this trend is expected to continue in the long term. Investors considering ILS investments should carefully consider the potential risks and returns in light of the changing market dynamics.