ILS growth depends on more than increased cat bond issuance: PCS

by Artemis on September 30, 2015

The catastrophe bond and insurance-linked securities (ILS) market has continued its path of evolution during 2015, underlined by strong issuance, the rise of cat bond lite transactions, and its ability to offer a growing range of solutions, according to Property Claim Services (PCS).

Following a record-breaking year for issuance in 2014 the catastrophe bond market has continued on its path of geographical, product and risk diversification and expansion, underlining the growing acceptance and understanding of cat bond and ILS structures in the risk transfer world.

“Clearly, the ILS market continues to evolve. A wider range of risk-transfer instruments with high rates of adoption demonstrates that innovation is addressing real needs in the market,” notes PCS in its latest quarterly catastrophe bond and ILS market report.

Highlighting the growing willingness of catastrophe bond sponsors and investors alike to broaden their reach outside of peak market sweet spots, catastrophe bond issuance so far in 2015 has focused on China, Japan, Turkey, Canada and parts of Europe, as well as the typical U.S. focused transactions.

Furthermore, while a widening scope of regions and risks continue to enter the catastrophe bond and ILS space, issuance in the first-half of 2015 focused on North America did actually rise by a number of deals, although issuance in size for the region declined by roughly $700 million, according to PCS.

So it’s evident that while issuance is increasing in new regions of the globe, cat bond and ILS market players still have an appetite for the more familiar perils in peak global zones.

“However, the need to expand coverage to new lines of business remains. ILS market capital keeps growing, increasing the need to bring more, and new, risk to the market. Without this, innovation is forced to focus on efficiency in tight markets, a role with only decreasing potential returns,” explains PCS.

According to the PCS report, based on its numbers and the deals it includes, so far in 2015 $4.5 billion of catastrophe bonds have been issued, a 20% decline on deal size for the same period in 2014, although transaction frequency did increase from 18 to 20 deals in the period.

A reason for this, notes PCS, is the ever-expanding utilisation of cat bond “lite” transactions, a sub-sector of the ILS space that has continued to show impressive growth during the first nine months of the year.

“While the traditional catastrophe bond market was fairly quiet in the third quarter, the cat bond lite market continued to push forward. Four transactions led to approximately $94 million in new limits,” says PCS.

PCS explains that four deals contributed to the $94 million of cat bond lite deals in Q3, and while the trigger for three of the deals was not disclosed the Dodeka VII transaction used the PCS Catastrophe Loss Index, a common trigger of choice for cat bond lite market issuance.

Cat bond lite issuance during 2015 amounts to $490 million from 16 transactions (again based on its numbers), double the full-year 2014 total that came from ten transactions, says PCS, further highlighting the impressive growth witnessed in this sector of the ILS landscape.

“Interest is growing in the cat bond lite structure across the market, with the greatest opportunities for traditional insurers and reinsurers seeking to securitize ILWs and other risk-transfer instruments. Inquiries to PCS about cat bond lite have accelerated this year, particularly from untapped areas of the market,” explains PCS.

The report predicts the rapid rise of cat bond lite transactions to continue throughout the rest of the year and beyond, noting “there’s plenty of interest from potential new entrants, and the involvement of traditional reinsurers in the cat bond lite market this year suggests that 2016 could be bigger than 2015.”

Another element of the cat bond and ILS market that has continued to gain traction is with the issuance of deals via publicly managed entities, which so far in 2015 PCS claims have raised $1.9 billion through the cat bond space.

PCS notes that of the six publicly managed entity sponsors that came to the market during 2015, all of them are returning sponsors, “reinforcing the trend involving veteran sponsor activity.”

The report declares that publicly managed entities “seem like a growth market for the ILS space, with six transactions from this sector representing a third of year-to-date catastrophe bond issuance.”

However, “finding new sponsors in this segment will be crucial for ILS growth, both for publicly managed entity market and the catastrophe bond space as a whole,” adds PCS.

Underlined by issuance in 2015 occurring across a variety of regions and perils, including Panda Re, the first catastrophe bond focused on Chinese risks, the market “clearly has an appetite for regional growth, and the benefits of ILS should help expand the catastrophe bond’s global footprint,” says PCS.

Furthermore, the report explains that following the launch of PCS Turkey earlier this year; the company is actively looking to enter new regions and business lines to support ILS and reinsurance industry growth.

“It appears overall ILS market growth will not depend on the increased use of catastrophe bonds, particularly since cedents can balance the rigor of those transactions with faster and less expensive approaches, such as ILWs and cat bond lite.

“The maturing of the ILS market in this fashion, based on the ability to help specific companies meet their capital management objectives, bodes well for ILS market growth. The ILS market, with the range of solutions it provides, is showing a growth trajectory that’s built to last,” concludes PCS.

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