Diversity and the hunt for diversification are key topics which regularly come up in our articles, our discussions with participants in the market and our coverage of deals and transactions in the catastrophe bond and insurance-linked securities spaces. Diversity is a factor which enables the market to grow, encourages investors to enter the market, makes transactions more attractive and enables a strong community of financial specialists to come together to bring complex risk transfer structures to market.
Reinsurer Swiss Re’s recent ILS market update, which we covered in more detail here, contained a few interesting graphs showing the diversity in perils, collateral types and triggers used in all of the outstanding cat bond and ILS transactions at the end of 2011.
The first graphic shows the perils which are currently securitized in outstanding cat bond and ILS transactions. This is the graph which we would like to see become even more diversified, through the inclusion of new types of risk in the market. An increase in types of peril and risk issued as ILS or cat bonds would help the market to grow. As you can see in the graph below, despite the market being just around $14 billion in size, it is pretty diverse with a good mix of perils involved in transactions.
The second graphic shows the collateral types which have been used in the outstanding cat bond and ILS deals at the end of last year. Again, it’s interesting to see the mix of collateral arrangements that have been used. We’d expect the percentage of total return swaps to decrease as the market has almost totally stopped using them for collateral purposes.
The third graphic shows the types of triggers which have been used in the outstanding cat bond and ILS deals. Again, this graph shows a good level of diversity. A few years ago it had seemed that parametric type triggers would have increased in usage further than they have, but industry loss trigger remain the favourite type of trigger mechanism, particularly in cat bond transactions.
So, what we’d really like to see at the end of 2012 is for the first graphic to become even more diverse as new types of risk come to the ILS and cat bond market. That is really the key for the ILS and cat bond markets continued growth and success. The other two graphs don’t need to become more diverse, but as long as a level of diversification continues it helps to keep the market varied and healthy. Of course the other area of diversification is geography, with the location of risks within cat bond and ILS deals also important to keep the market varied for investors.