Asia accelerates and innovation abounds

The cat bond market has delivered another record year in 2021 as it continues to break new ground, Ahren Lester writes

The catastrophe (cat) bond market has delivered another record-breaking year in 2021, with a month to spare, as the market continues to innovate, Asian markets accelerate, and parametric contracts increasingly become a core trigger.

According to Artemis, cat bond issuance has already exceeded the record-breaking $11 billion in 2021 by the end of November. Total 2021 insurance-linked securities (ILS) issuance, meanwhile, has set a significant new annual record at $18.9 billion – exceeding the record $16.4 billion in 2020, and the fifth year in a row that annual issuance has exceeded $10 billion.

Catastrophe risk management – Global
CategoryWinnerRunner-up
Best dealer (structurer/arranger) Swiss Re Willis Towers Watson
Best broker Marsh McLennan Willis Towers Watson
Best advisory Speedwell  
Best law firm Baker McKenzie  

Market growth has been supported by continued market innovation. Several new sponsors have entered the market, with other novelties in 2021 including the first pure volcanic risk cat bond sponsored by the Danish Red Cross in March, and China Re issuing the first Hong Kong-domiciled cat bond in September.

Marc PaaschMarc Paasch – alternative risk transfer and ILS solutions head at Willis Towers Watson (WTW), runner-up in the Best Dealer and Broker categories – said the Hong Kong developments supplement the significant Asian ILS market developments since Singapore started its ILS business in 2018. He expects an increasing number of

Hong Kong issuances in the future backed by "strong support" from the Chinese government.

There remains a gap between the economic loss and insurance loss from natural disasters across Asia, however, and Paasch believes a key development for the ILS market will be growth in the region more broadly. An early indication of this rising Asian interest includes several government disaster risk financing solutions which applied parametric triggers.

Indeed, Speedwell Weather – winner in the Best Advisory Category – said there was an increasing global shift towards parametric triggers amid a trend towards "more efficient market solutions".

"These parametric contracts are preferable as they are easy to understand, transparent, and quick to settle," said Speedwell co-chief executive David Whitehead. "As the catastrophe market continues to evolve, we expect a greater push towards parametric triggers."

David Whitehead"In anticipation of this, we have expanded our product line beyond weather to include climate and environmental variables such as tropic cyclone, wildfire, windstorm, air quality, sea state, global temperature, carbon dioxide, and so forth," Whitehead said. Additional services are expected to be launched in 2022.

One such parametric transaction was the $50 million California wildfire cat bond secured in December 2020 by the Los Angeles Department of Water and Power (LADWP), the largest US municipal utility. This transaction was the first wildfire cat bond issuance by a municipal utility, and was followed by a further $30 million wildfire cover by the LADWP in September 2021 – but this time with the more common indemnity trigger.

Ilona Millar – global climate change practice head at Baker McKenzie, winner in the Best Law Firm category – said this public utility wildfire risk cover was an "interesting development" in the market, considering the exposure of utilities to significant fire risk.
Insert picture of Ilona Millar

"In light of the increasing occurrence and severity of fires and other climate related disasters, we may well see more utilities with exposure to climate risk look to these markets for cover," she said.

Ilona MillerAnother area of innovation in 2021 has been the long-awaited emergence of environmental, social and governance (ESG)-related ILS transactions. In June, Generali sponsored a 'green' cat bonds – believed to be the first 'green' ILS ever issued.

"ESG investing will be an area of focus in 2022," said WTW's Paasch. "ILS arguably have favourable ESG characteristics, which is especially attractive to EU and Swiss investors. The outstanding question is how to translate the principles of ESG into specifics.

"Using alternative capital to create more available and affordable insurance that is more accurately valued considering climate change would be ESG-positive.

Collateral can also be ESG-positive where, for example, proceeds from World Bank notes fund sustainable development."

In a year still marked by the effects of the Covid-19 pandemic, Paasch said an important development would be pandemic risk cat bonds – helping to mobilise and implement contingency plans quickly and financing localised lock-downs.

Supply chain risk is also ripe for adoption by the cat bond market, he said.

"There is solid data related to global trade – for example, port activity, traffic, footfall etc. – to structure solutions that take on the risk of supply chain disruptions," Paasch said. "We would like these solutions to focus on critical products, and on guaranteeing contingency for populations and economies most exposed to disruption."