Diversification and growth expected for cat bonds & ILS in 2016

by Artemis on December 24, 2015

The catastrophe bond market is expected to continue to expand its remit in 2016, as sponsors look to leverage capital markets risk transfer for a wider range of risks and perils, while ILS investors look for new diversification opportunities.

After another healthy year of new catastrophe bond issuance in 2015, GC Securities, the investment banking and capital markets broker-dealer arm of reinsurance broker Guy Carpenter, forecasts more innovation for the cat bond and ILS market in 2016.

“The largest of the peak perils continues to drive the ILS marketplace,” GC Securities explained in its recent cat bond market report.

But with a significant percentage of the outstanding market exposed to the U.S. peak perils of hurricanes and earthquakes, the drive to diversify and access ILS capacity for more types of risks continues to build.

“The focus by cedents and ILS investors to further expand the application of ILS to risks beyond natural perils grows stronger each day,” GC Securities wrote in the report.

And while the main focus of the catastrophe bond market is likely to continue to be on the peak perils, where the need for efficient risk transfer capacity is greatest and the returns for investors also tend to be higher, expansion to new risks and regions is likely.

“2016 will see new perils, new geographies, new types of protection structures and new sponsors,” GC Securities forecasts.

The firm notes that competition from traditional sources of reinsurance capacity for diversifying risks always tends to be strong, which can keep some perils from breaking through into cat bonds and ILS. However, GC Securities believes expansion will happen, driven by increasing uptake of risk transfer.

“As (re)insurance penetration in regions we see as diversifying (Europe, Asia, Latin America) grows, we believe it is a matter of time before these regions “open up” to alternative capital,” GC Securities explained.

GC Securities sees Asia and Latin American in particular as “high growth regions” for alternative capital and ILS, which as insurance penetration increases and the need for reinsurance capacity grows, should see increasing amounts of risk from these regions ceded to ILS capacity.

Investors will be looking for something new in 2016. 2015 has been a strong year for catastrophe bond and ILS issuance, despite not beating the record set in 2014, but the mix of perils has remained largely focused on the U.S. and diversification and expansion is required in order to support investors ambitions for deploying more capital into insurance-linked securities (ILS).

GC Securities also expects the cat bond and ILS market to continue to grow in 2016 and that despite the slower expansion in 2015; “We believe that alternative capital structures will be a consistent source of risk capital for (re)insurance and corporates and expect to see sustained high growth to continue in this sector.”

Also read:

Cat bond pricing holds steady, ample capital still available: GC Securities.

Private cat bonds provide ILS test-bed & entry-point for sponsors: GC.

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