Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Corporate & government entity sponsors to grow ILS: Judith Klugman


Future growth of the insurance-linked securities (ILS) and catastrophe bond market will, in part, be driven by the increased entry of corporate and government sponsors in the space, according to Swiss Re Capital Markets Managing Director, Head of ILS Distribution, Judith Klugman.

The catastrophe bond market ended 2015 with an impressive, and record outstanding market volume of $25.961 billion, representing outright growth of roughly $681 million from 49 transactions that amounted to $7.898 billion of new issuance, according to data from the Artemis Deal Directory.

A large volume of cat bond transactions that come to the market is typically from primary insurers and traditional reinsurers, but in recent years corporate and government entity sponsors have become a more common feature of the space.

“One of the things we noticed at Swiss Re is that when we took a look at the second half of 2015, the new issuance, the composition of who came to market, was very heavily dominated by government entities, state pools, and by corporate entities, which is remarkably different than in the past where it’s really primary insurers which were driving,” said Klugman, speaking with A.M. Best at the SIFMA IRLS 2016 conference in New York.

An example of this can be seen with the $275 million PennUnion Re Ltd. (Series 2015-1) cat bond transaction from corporate sponsor, the National Railroad Passenger Corporation, Amtrak. Providing the organisation with insurance protection against the perils of U.S. storm surge and wind from named storms, as well as earthquakes.

As highlighted by Klugman, they weren’t the only non-insurance entity, or corporate/government organisation to secure insurance protection from the capital markets during 2015 and prior, a growing trend that Klugman expects to persist and intensify in the coming months.

“As we think about whether it’s new types of perils, whether it’s flood, new types of sponsors, more corporate entities or government entities, that’s how it’s going to continue to grow at Swiss Re,” said Klugman.

Adding that the reinsurance giant has inquiries from a vast array of institutions that are looking at accessing the catastrophe bond and ILS market’s risk transfer capabilities.

“That’s very healthy for our market. It goes to show that these entities, especially government entities, see tremendous value in the immediacy of a cash payout through a bond mechanism,” said Klugman.

A common feature of a catastrophe bond sponsored by a corporate or government entity, as seen with Amtrak’s PennUnion deal, among others, is the utilisation of a parametric trigger structure, which enables rapid payout post-event.

Klugman underlined the attractiveness a parametric trigger structure has for non-insurance organisations, something that was also discussed by re/insurance broker Aon’s ILS division, Aon Securities, which noted a rise in parametric deals in the latter stages of 2015 as a result of increased interest from corporate sponsors.

Catastrophe bonds can be a very efficient way for corporates and government entities to cover peak exposures, either as a standalone issuance or as a complimentary supplement to insurance or reinsurance programmes.

This would provide further coverage for those in need while also bringing new risks and opportunities to the market, highlighting the increased comfort and understanding the risk transfer landscape now has with the ILS asset class, and also showing how corporate entities and pools have a growing desire to access the capital markets as well as the traditional reinsurance space to optimise efficiency.

The more corporates, government entities, state pools/funds and so on that access the market and utilise the efficient structures, knowledge and skillset of the ILS and cat bond market, the more it’s likely to gain traction and snowball.

In order for the ILS sector to continue down its impressive growth path and take a greater share of the reinsurance market volume will be through new risks and geographies, something that the type of non-insurance organisations highlighted by Klugman can bring to the market, including the potential for public-private sector partnerships.

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