Swiss Re Insurance-Linked Fund Management

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Catastrophe bond market positioned for next stage of growth: Swiss Re


The trend of increased new issuance volume in catastrophe bonds is expected to continue, with positive growth of the cat bond market expected as a result, according to Swiss Re Capital Markets.

investment-growthThe capital markets and broker-dealer entity of the Swiss Re reinsurance group expects that insurance-linked securities (ILS) in catastrophe bond form will continue to fill out any gaps in property catastrophe reinsurance capacity over the coming years.

In reporting on a busy first-half for the catastrophe bond market, Swiss Re’s Capital Markets team highlight the recent trend towards a pulling-back of some reinsurance capacity that had been focused on property catastrophe risks and how that has presented an opportunity to the cat bond marketplace.

During the first-half of the year, “The ILS market gave sponsors an alternative source of risk transfer capacity in a hardening reinsurance market,” Swiss Re Capital Markets explained.

The reinsurance firm believes that the pulling-back of some traditional underwriters of property catastrophe risks has led to an opportunity for the ILS market, something which could provide an ongoing opportunity for market growth.

“Some reinsurers have reduced capacity in peak zones or closed their natural catastrophe (nat cat) portfolios entirely, which has led to increased opportunities in the ILS market,” the reinsurers ILS focused business unit explained.

Adding that, “Given the need for more overall reinsurance capacity, we expect the trend of increased new issuance volume to continue and result in further growth.”

The first-half of the year has provided further evidence of the strength of the catastrophe bond and insurance-linked securities (ILS) asset class, Swiss Re believes.

Both investors and sponsors have derived benefits from cat bonds through the first-half of 2022, the former in a relatively uncorrelated source of return that performed much better than many asset classes, the latter through the availability of reinsurance risk capital to support their needs.

On the cat bond investor side, Swiss Re said, “Some who remained on the sidelines in 2020‒2021 returned to capitalize on the relative value of the cat bond market as a diversifying asset class with competitive returns.”

While for sponsors, “Cat bond supply remains high as sponsors are now more than ever in need of larger lines of capacity to support inflated claim costs and minimize earnings volatility.”

Overall, Swiss Re sees the first-half in catastrophe bonds as “positioning the market well for its next stage of growth.”

“Swiss Re Capital Markets (SRCM) sees increasing interest from both new potential sponsors looking to diversify their risk transfer capacity sources, and from end investors who want to benefit from this historically lightly correlated asset class,” the company explained.

Continuing to say that, “Bringing both of these groups to the ILS market is a key objective of SRCM as we continue to lead the market forward.”

The reinsurance hard market, combined with some reinsurers shift away from property catastrophe risk exposure, has presented a clear opportunity for the ILS market to support companies risk transfer needs.

“Even during a hard market, catastrophe bonds remain an attractive source for alternative re/insurance capacity for both new and existing sponsors who seek to explore how these innovative and historically lightly correlated instruments could support their franchise,” Swiss Re Capital Markets said.

Join us at our London conference on September 6th to hear more about catastrophe bond market opportunities.

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