Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Divergent execution a sign of a mature ILS market: Swiss Re


Catastrophe bond and insurance-linked securities (ILS) market execution through 2021 was not uniform, which global reinsurance firm Swiss Re highlights is a sign of the market becoming increasingly mature.

Divergent catastrophe bond and ILS executionAs you’d expect, the catastrophe bond market in particular is maturing fast and the way deals execute, as well as how they price both in primary and secondary markets, can provide signals as to how the ILS market and its investor-base is behaving.

One notable factor from 2021’s record year of catastrophe bond issuance, is the fact execution has been seen as particularly attractive in the cat bond and ILS market for certain risks and structures, but not for all.

The shift in appetite away from certain aggregate structures has been well-documented, of course, as well as some investors move up the risk tower and away from working layers of reinsurance or retrocession.

But there are also signs of divergence in how new cat bonds have executed in the primary market, according to Swiss Re’s Ed Johnson, Head ILS Sales EMEA & APAC at the reinsurance company.

“Growth and pricing trends have not been uniform across perils, structures and sponsors,” Johnson explained.

Adding that, “Pricing has for example tightened considerably for well-understood perils like California earthquake, whereas structures exposed to high frequency, and harder to model secondary perils like thunderstorm and wildfire have seen pricing increases and smaller deal sizes.”

One area of divergence has been in aggregate structures, with aggregate cat bond pricing diverging from risk-comparable occurrence structures over the years.

As investors have grown weary of losses from aggregate structures, both a shift in execution and also in structure is now being seen.

A switch to use of event deductibles, over franchise deductibles, has been one positive step taken by the market, Swiss Re believes.

All of these factors are signs of the catastrophe bond market becoming both more sophisticated and cognisant of the protection sponsors need, as well as the needs and appetites of ILS investors.

“This is a sign of a mature and well-functioning market, to see such divergence in deal execution both from a pricing and structure perspective,” Johnson said.

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