ILS & cat bond growth strong but “one-dimensional” – Johansmeyer, PCS

Despite catastrophe bond and insurance-linked securities (ILS) issuance breaking records in 2017, with H1 issuance reaching a staggering $9.761 billion, growth remains “one-dimensional” and entering new lines of business is a top industry priority, according to Tom Johansmeyer, Assistant Vice President (AVP), PCS Strategy and Development.

PCS has launched its 2017 H1 Catastrophe Bond Report, which, like the Artemis Q2 2017 Catastrophe Bond & ILS Market Report, reveals that a record-breaking first and second-quarter has seen issuance reach its highest ever total for a single year, and the outstanding market reach a new high, of $29.3 billion.

But while growth in 2017 has been strong, and despite the catastrophe bond and ILS asset class clearly remaining attractive to both the investor and sponsor community, recent market expansion has been “one-dimensional,” said Johansmeyer of PCS, speaking with Artemis.

“It’s still overwhelmingly property-catastrophe. New lines of business remain top priorities across the industry, and we’ve seen these efforts shift recently from banter on conference panels to planning and execution.

“The ILS market has done a great job of testing new ideas over the past few years, but many of those ideas never achieved scale. That’s the missing link, and if some of the innovation currently being planned can get momentum beyond proof of concept transactions, then the sector’s growth potential will transform from its current linear state.”

PCS recorded $6.5 billion of issuance in the second-quarter, which takes H1 2017 issuance to $8.8 billion, according to its numbers. Owing to the inclusion of private deals Artemis recorded $7 billion of Q2 issuance and H1 2017 issuance of $9.761 billion, as shown by the Artemis Deal Directory.

But regardless of the difference in numbers, the fact remains that the large majority of ILS and cat bond issuance continues to focus on the property catastrophe space, most likely driven by ease of entry and the increased understanding of exposures when compared with other, perhaps more complex and emerging risks.

“Of course, we’re optimistic about the opportunity to ‘expand the base’, so to speak, beyond property-catastrophe. Although we are working on new risk areas right now, the PCS specialty lines effort has drawn solid support from across the market. Beginning with the launch of PCS Global Marine and Energy in April (which has had some take-up even this early in the life cycle), we’re now working on a number of additional global speciality loss index solutions, including cyber.

“It’s hard to conceive of a business that could meaningfully put a dent in the ILS market share owned by US natural catastrophe risk. While it’s still early in the game, we believe cyber could be the first new line of business in ILS to become large enough to affect the structure of the market meaningfully,” Johansmeyer told Artemis.

Artemis has discussed a number of times over the last couple of years how ILS and capital markets skills, willingness, and importantly capacity, is likely required to tackle the huge cyber risk issue. With industry experts noting how improved regulations and analytics/data can help the cyber ILS market expand, and flourish.

As shown by the Artemis Deal Directory, the second-quarter of 2017 did feature some risk outside of the property catastrophe arena, a $211.32 million Oaktown Re Ltd. (Series 2017-1) deal sponsored by National Mortgage Insurance Corporation, protecting against mortgage insurance risks.

However, at $211.32 million, the deal accounted for just 0.3% of Q2 issuance, and just 0.2% of H1 2017 issuance. So it’s clear that property catastrophe risks, and in particular U.S.-focused exposures, continue to dominate catastrophe bond issuance.

PCS, in its report, states that the ILS market “wants more variety,” with conversations about where the market should look to next often including discussions about specialty lines.

As noted by Johansmeyer and in the PCS report, the launch of PCS Global Marine and Energy should stimulate innovation and result in an ILS or cat bond transaction from this business line.

The full PCS Global Marine and Energy database launched in April, 2017, as is the firm’s first entry into the non-catastrophe arena.

“Terror and cyber remain important opportunities that would help solve a significant problem for the market. And we’ve also been asked about other lines. Property-catastrophe should be the first stop on the journey, not the destination,” said PCS.