Broker Guy Carpenter has published their January 2012 renewals report today. The 80 page report goes into great detail on some of the trends seen during 2011 in the reinsurance market, how the renewals panned out, forecasts for the industry for 2012 and some interesting commentary on areas such as insurance-linked securities, catastrophe bonds and industry-loss warranties. Of most interest to our audience are the comments on these alternative areas of the market on which Guy Carpenter is extremely positive.
Guy Carpenter sees a continuing trend for the sector to look at non-traditional reinsurance coverage solutions with interest in capital market based solutions growing. They say that this trend is expected to continue into 2012 with “significant growth anticipated in the catastrophe bond and industry loss warranty (ILW ) markets.”
On catastrophe bonds, Guy Carpenters says that a deep pipeline of transactions exists for the first half of 2012 and beyond. One trend Guy Carpenter noted in the last quarter of 2011 was for annual aggregate transactions to dominate issuance as sponsors focused on achieving coverage for multiple event ‘sideways’ exposures, a definite reaction to the catastrophe dominated 2011. The market supported these deals, said Guy Carpenter, as they provide an opportunity for increased yield as well as offering some diversification to investors against single-event, low probability cat bonds.
2011 was the second most active year for issuance of cat bonds, equal to 2009, with 18 144A cat bond transactions from 14 sponsors. U.S. hurricane dominated the market yet again with 23 of the 30 tranches of notes brought to market having some exposure to U.S. wind. Asia Pacific exposure within 2011 deals was down on previous years, a reaction to the heavy catastrophe losses in the region in the first half of the year. Index-based triggers dominated the market and Guy Carpenter note the increasing prevalence of PERILS linked cat bonds in the European wind area with all but one European Windstorm cat bond using an index-based trigger PERILS.
2011 was one of the most active, innovative and robust years in the convergence markets history, says Guy Carpenter, this despite the host of difficulties, challenges and real losses the sector experienced. The market has developed to offer a much broader suite of convergence and capital markets linked reinsurance options. The 144A cat bond market should remain the backbone of the convergence sector, they say, but strong investor interest in collateralized reinsurance, retrocession, private cat bonds and insurance-linked securities and some exchange traded products allows for product flexibility and a good risk management and transfer mix to be achieved. Convergence sector capital is expected to continue expanding in relevance for the catastrophe risk transfer arena as a whole.
For 2012, Guy Carpenter expect brisk issuance of a diverse set of transactions containing both peak risks and more local, geographic or regional perils including more European windstorm and also some Japanese perils transactions as well as a range of structures and trigger types. That will be welcomed by investors seeking new diversification opportunities. Aggregate covers are expected to maintain their attractiveness to sponsors despite the Mariah Re losses. They also see a good chance of more new types of risk coming to the securitization market helped by an evolving and maturing investor base who are learning to understand and price new perils.
On industry loss warranties, Guy Carpenter says that the 2012 renewals have seen significant ILW limits bound. The ILW market tends to react to shortages in other areas (such as the much discussed shortage of retro capacity). So given the dislocation in the retro renewals Guy Carpenter expects some ILW’s to be placed in early January to bolster any shortfalls in coverage. ILW pricing has been hardening as a response to the catastrophe’s in 2011 and also the RMS model updates. Strong demand for ILW’s is seen by Guy Carpenter, particularly in the first-half of 2012. Overall Guy Carpenter anticipates a very good year for the ILW sector and a chance for it to capitalise on the difficult year in 2011.
Guy Carpenter lays out a number of key themes which they see developing in the coming year and the number one theme is an increasing desire from cedents to achieve aggregate covers. Of course cat bonds are ideally placed to offer this sort of cover so that could help to heighten interest in the sector again.
Overall Guy Carpenter are extremely positive on the convergence, ILS, ILW and cat bond sectors. The report is worth reading in full and contains a lot of additional insight on the renewals by line of business. You can download the report in full here.