16 December 2020

Creativity and transparency drives market forward

The cat bond market is closing in on another record year, writes Ahren Lester

The catastrophe (cat) bond market is closing in on a potentially record-breaking year, as tightened traditional reinsurance markets and growing innovation draws in new and established participants.

Logan Davis Fox – underwriting director for the reinsurance division of Nephila Capital, the winner of Best dealer (structurer/arranger) for the third year in a row – says traditional reinsurance and retro markets saw tightening terms and rate hardening due to increasing storm losses, an active hurricane season and complexities brought about by Covid-19. In contrast, the cat bond market has "fared well" as it has been largely insulated from these 'in the money' events.

Logan Davis Fox

Willis Towers Watson (WTW) – runner up in the Best broker category – says that in the non-life cat bond market, a rebound in annual issuance means the segment is on track to hit record levels in 2020 – after investors saw "increasing value" in cat bonds relative to other forms of insurance- linked security (ILS) investments, which also includes collateralised reinsurance, sidecars and industry loss warranties.

According to data from Artemis, cat bond issuance has reached over $9 billion in 2020 to date – considerably higher than the $5.3 billion in 2019 and closing in on the record $9.9 billion issued in 2017.Total ILS issuance, meanwhile, has crossed $14 billion – compared with $11 billion during the whole of 2019 – and represents the fourth year in a row that annual issuance has exceed $10 billion.

Willis Re senior vice president Quentin Perrot says demand for cat bonds has benefitted from the unexpected losses that investors have incurred on traditional bilateral instruments which have left them "trapped".This trend has heightened the appeal of the more orderly losses experienced on cat bonds, in addition to the more transparent and liquid nature of the bonds.Quentin Perrot

Davis Fox says 2020 has been particularly active in the primary issuance space, where there has been a record number of new bond deals.

"Many of these are returning sponsors looking to renew maturing notes with similar structural features," she says. "But, more interestingly, there are a large number of new issuers coming to the market for the first time – or the first time in a long time – to take advantage of the current market environment."

For example, Google-owner Alphabet came to the market to secure Californian earthquake insurance protection. "If similar large corporates follow suit, this could result in greater demand for capacity and diversified risk," she says.

The market is also "getting creative" and testing unique cat bond structures, Davis Fox says, with a cat bond providing wildfire protection being marketed for a utility firm that uses a blend of a parametric and modelled loss as a trigger.

The rising appeal of parametric triggers helped newcomer Parameter Climate (PC) to top the Best advisory category. Launched earlier this year by industry veteran Martin Malinow, PC seeks to capitalise on the "rapidly growing" parametric market of recent years.

Martin MalinowMalinow – formerly president of Sompo GlobalWeather – says companies have become more aware of their climate risk and are looking for ways to try and address this after the 2017 Atlantic storm season saw three major storms hit in short order.

"What was laid bare by that experience was that it was difficult to loss-adjust for traditional indemnity products in any rapid manner," he says. "It made a very clear case for parametric products that could settle within days of the event." Parametric bonds can be settled in 10 to 15 days.

Parametric products are also well suited to non-damage business interruption, he says, as they provide a "very neat and objective" way of protecting against these expenses.

In 2021, all three market participants expect the cat bond market to continue to grow – especially in the US, where disruption caused by Covid-19 has meant that many cedents were unable to get to market in 2020.

Perrot cautions that we should not expect the cat bond market to surge in 2021 as it has in 2020, however, instead forecasting "healthy growth" led by "solid" investor demand.