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Cat bond rates rise 13% in Q1, up 56% since 2016: Lane Financial

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Catastrophe bond and insurance-linked security (ILS) rates-on-line were up by a huge 13% in Q1 2020 and have risen by 56% since the end of 2016, as measured by the synthetic ILS rate-on-line Index calculated by Lane Financial.

It puts cat bond and ILS rates firmly in hard market territory, with the Lane Financial rate-on-line index now back at a level not seen since mid-2012.

The latest data from consultancy Lane Financial LLC’s synthetic ILS rate-on-line Index shows that rates in the catastrophe bond market experienced strong gains in the first-quarter of 2020, as the chart below shows.

catastrophe-bond-ils-rates-on-line-index-q1-2020

It reflects ILS investor demand for more return from their investments in reinsurance linked instruments, following the losses of recent years, as well as cat bond spread increases in the secondary market as well.

Lane Financial’s synthetic rate-on-line Index utilises data from catastrophe bond, insurance-linked security (ILS) and industry-loss warranty (ILW) markets, offering an approximation of premiums being paid (or rate-on-line) for ILS and cat bond transactions. It is considered one of the ILS sectors bellweather benchmarks.

Commenting on the first-quarter, Lane Financial explained, “Our Synthetic Rate-on-Line Index, Figure 1, closes out March 2020 with a reading of 131.2. That is a 13% jump since year-end 2019 and looking further back a 56% jump since end-2016. It confirms the hard market status.”

The consultancy also noted that, “Outstanding ILS are at a discount to issue. New issues will necessarily have higher coupons, implying higher rate- on-line reinsurance prices.”

Adding that the influence of the coronavirus pandemic in late Q1 also played a role as, “ILS suffered a 2-5% swing in prices to the downside, with yields pushing higher as our RoL Index has suggested.”

Reinsurance rate firming is now forecast to continue, driven by pandemic related factors and claims, which also suggests catastrophe bond premiums will continue to rise on primary issues, while the secondary market gap between par and outstanding values should narrow over time.

You can download Artemis’ series of quarterly catastrophe bond market reports here.

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