Development of The ILW Market
The first contracts of this type were traded in the 1980s. This market remained fairly small (though influential in price setting for reinsurance as these contracts are more consistent than most reinsurance treaties) through Hurricane Katrina. The entry of many hedge funds into the market (for which ILWs are a preferred trading vehicle) along with the breakdown of the retrocessional reinsurance market (reinsurance for reinsurers) led to the growth of the ILW market.
The ILW market has no recognized exchange or clearing source to track volumes. Size estimates range from $2bn to $10bn outstanding (Aon, Nephila). The pre-Katrina market in terms of outstanding contracts was likely near the low end of that range and the post Katrina market is likely to have moved upward within that range.
Read more about this topic: Industry Loss Warranty
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