Cat bond terms may loosen next year, but discipline won’t break: Perrot, Marsh Securities

As the insurance-linked securities (ILS) market moves into a softer phase, Quentin Perrot, Managing Director at Marsh Securities, said during a recent AM Best webinar that while terms for catastrophe bonds may loosen next year, he does not foresee discipline in the asset class breaking.

Perrot made these remarks during rating agency AM Best’s recent ILS-focused webinar, moderated by Emmanuel Modu, Managing Director.

Panellists covered the broader ILS market, but the exchange on frequency risk focused on property catastrophe structures.

Moderator Modu noted that aggregate and second-event covers were returning and attachment points were under pressure, which led to him to ask whether ILS capital would follow reinsurers into frequency risk.

Perrot outlined that a move into frequency risk would go too far. The MD described the ILS market as easing from the exceptionally hard conditions of 2023, while arguing that structures remain controlled.

“Moving into frequency risk is maybe a step too far. We are seeing a regular loosening of some of the structures, but most of the 2023 structures were in a very hard market. So we are not going into frequency risk. We are just going to a market that is a bit softer, where to maintain multiples and maintain absolute returns, investors see advantages to slightly loosen the terms of the bond. But those bonds are still extremely vanilla in the way they are structured,” Perrot said.

“We are not seeing any unreasonable structures. For instance, ground-up structures are very few in numbers. We always have high deductibles, and the perils are still modeled, so there is still a lot of discipline in the space.”

Looking ahead to 2027, he said: “We can anticipate some loosening of discipline, but we don’t see it breaking. We see the investors still being very reasonable in the way they assess the risks they want to invest in.”

Pricing has nevertheless softened in the cat bond market, with Modu citing loss multiples of about 2.5 times expected loss earlier in the year, down from roughly 5 times in 2023.

Perrot said some recent cat bond deals had multiples closer to 1.1 times, near levels that were last seen around 2016/2017. He said it was too soon to know whether those levels would persist, or they simply reflect the current market status and investors needing to put available capital to work.

Importantly, the panelists stressed that cat bond pricing varies by peril and structure, so market averages can obscure differences in risk.

Bart Thomas, Director of Business Development at Leadenhall Capital Partners, also emphasised that the cat bond market was continuing its downward trend in spreads going into 2027. He cited a consensus of rate reductions in the low double-digits, while noting that pricing had come down from the unusually high levels of 2023.

Despite the softening, speakers said ILS continued to attract investor interest. Michael Stahel of LGT ILS Partners said there was “continued support for the asset class,” which he described as “fundamentally attractive” heading into 2027.

“Several other asset classes, alternative asset classes, come with an inherited level of risk that you clearly don’t see in the ILS space. Yes, pricing may have compressed, but the risk as such is still very much the same and has not been affected by broader, I would say, activities in financial markets,” Stahel said.

“As an ILS manager, it’s actually quite easy. Cycle management means I’m informing my investors what I expect in 2027 in terms of return, in terms of multiple, to use your your terminology, and then I see whether investors would want to continue allocating. Or if they see other alternatives, they might want to redeem. So that’s proper cycle management as it should be.” 

Thomas also said investors who continue allocating to ILS do so because, relative to other asset classes, it remains an attractive investment with diversification benefits.

“We are very transparent with our investors in terms of the target return that we aim to achieve with our fund over the year, that gets adjusted every year based on market conditions. And therefore investors allocate their capital knowingly. And if they choose to continue allocating to the asset class, it means that at least comparatively to other asset classes, it’s still a very attractive play. Notwithstanding the compelling diversification benefits that remain,” Thomas added.