French insurance and reinsurance carrier AXA is not renewing its property catastrophe bond for 2018, as the firm currently finds traditional reinsurance pricing more attractive and sees the costs of sponsoring cat bonds, both financially and in terms of effort, as high.
AXA has tapped the catastrophe bond market a number of times as a source of collateralised reinsurance capacity for certain property catastrophe risks, with its Calypso series of transactions providing it with European windstorm protection since 2010.
Most recently AXA sponsored a Calypso Capital II Ltd. (Series 2013-1) cat bond transaction for its property casualty division, securing EUR 350 million of European windstorm reinsurance protection from capital market investors. The last remaining tranche of this cat bond matured in January 2018.
But, according to a report in French publication The Insurance Tribune, AXA has elected not to renew the cat bond protection for two reasons.
Firstly, AXA finds the professionalisation of the ILS fund market an issue for it, as being a relatively small retrocessionaire (for its reinsurance book) it prefers to deal with traditional reinsurers where it can. This is a rather odd comment at a time when even the largest global reinsurers are striving to become more efficient and leveraging increasing amounts of third-party capital to do so, but the article does not explain it well.
Secondly, cost is an issue for AXA.
The insurer says that cost of retro reinsurance coverage has become more equal, between traditional and alternative sources, but add int the added cost and effort for setting up a cat bond and the legal overhead required and AXA finds ILS less attractive currently.
But perhaps most importantly and tellingly for the state of the European reinsurance market, AXA says that while catastrophe bonds can be efficient in markets such as the United States and Japan, they are less so in Europe.
This is because European property catastrophe reinsurance and retrocession remain incredibly cheap, from traditional sources, as they have done for many years.
Gradually the number of European windstorm cat bonds has tailed off, as traditional reinsurance arrangements can be much cheaper than ILS investors are prepared to go.
For a number of years now, some of the largest ILS funds and investors have been shrinking their European catastrophe risk portfolios, as the returns have failed to live up to the risks often assumed.
Large traditional reinsurance firms can offer their European coverage at very low prices, as a diversifying region within their global portfolios. It is not as easy for ILS markets to get comfortable with assuming European windstorm risks, and the like, at such low pricing levels.
However, Guy Van Hecke the director of reinsurance at AXA Global Re, told the Tribune that AXA could return to the alternative market in years to come, if it becomes more competitive.
This issue, of European windstorm cat bond sponsors turning away from the market has been evident for a number of years. AXA was one of the larger companies that became a repeat cat bond sponsor. It’s a shame to see them move away from the market, but understandable if traditional pricing still remains so close to expected loss (which has been the case in recent years).