Cat bonds hit new high, corporate interest to drive growth: Aon Securities

The catastrophe bond market reached a new high at the end of 2015, with the level of issuance during the year outstripping a record high level of maturities, resulting in the market reaching the end of the year with cat bonds on-risk standing at an all-time high, according to Aon Securities.

The investment banking and capital markets arm of insurance and reinsurance broking group Aon has published its latest ILS and catastrophe bond market report. The report looks at the robust issuance in 2015 and discusses the growing interest from corporate sponsors, which is resulting in more fronted and parametric ILS or cat bond issuance.

However the report also explains that competition from traditional reinsurance companies has been high in 2015, which likely results in some risk that could have been structured as cat bonds being transferred to the traditional market instead.

“Good momentum was maintained in the ILS sector during 2015 amid an environment of increased competition with traditional insurance and reinsurance solutions. This strong level of activity ensured that at year-end, catastrophe bonds on-risk stood at an all-time high,” Paul Schultz, CEO of Aon Securities explained.

During 2015 Aon Securities counted $6.9 billion of new ILS issuance, with the first quarter seeing a record issuance of $1.7 billion. Property catastrophe bonds accounted for the majority of the issuance, as is the norm, with $6.3 billion of transactions covering property catastrophe risks.

The figures are below those collected by Artemis during 2015 as we also cover private cat bonds and some life/health deals, which took our total issuance figure for 2015 to almost $7.9 billion.

By the end of the year Aon Securities saw the outstanding catastrophe bond market reaching a record high level at $24.4 billion, which is below the $25.96 billion record that Artemis recorded due to differences in the transactions covered again.

By Aon’s figures the outstanding cat bond market has grown in size every year since 2012, testament to the increasing acceptance of catastrophe bonds as a form of reinsurance or retrocessional protection and also to the growing maturity of the ILS investor base.

The report from Aon Securities highlights the proliferation of parametric catastrophe bond deals in the second half of 2015, with four transactions coming to market. Parametric triggers “had been scarce in the market in recent years but which are currently proving attractive to non-insurance corporations, a key segment for potential growth in the ILS market,” Aon Securities explained.

“During the year we were pleased to see the growing acceptance of ILS products by corporations, which are tending to opt for fronted and parametric solutions for their inaugural issuance. These solutions have the advantage of a more rapid loss recovery,” Schultz continued.

With corporate interest growing and non-insurance entities finding the parametric trigger an effective way to secure insurance coverage from the capital markets, further growth could be ahead for the ILS and cat bond space.

However continued aggressive competition from traditional reinsurance capital sources could mean we don’t see another significant jump in market growth, with slow and steady progression more likely to be the case through 2016, according to most observers.