The market for insurance-linked securities (ILS) and catastrophe bonds saw “dramatic movement in pricing” in the fourth-quarter of 2016 as the January reinsurance renewals approached, with decreases as high as 30% seen that were partly responsible for triggering reinsurance softening.
Global reinsurance broker Guy Carpenter has published its view on the 1/1 renewal season, reporting that price declines across reinsurance moderated, but that in ILS markets prices declined more steeply.
Catastrophe bonds were where pricing fell the most dramatically, likely a function of demand from investors and ILS funds for new paper in a year when issuance (while relatively brisk) was not as high as needed to satisfy the appetite to invest.
Guy Carpenter notes that while the first-quarter of 2016 saw a record for catastrophe bond issuance, the second-quarter fell to the lowest level since 2011 on its figures, all of which led to a much slower pipeline.
Even the fourth-quarter, which on Artemis’ figures saw over $2 billion of issuance leaving the market ending the year at a new record high of $26.82 billion, was insufficient to soak up pent-up investor demand, meaning that rates had only one way to go on end of year cat bonds.
“In response to this diminished pipeline, catastrophe bond providers responded with greater flexibility in coverage and significant decreases in price,” the broker explained.
The price declines seen on ILS have helped to stimulate further decreases in the reinsurance market Guy Carpenter believes, although there is still evidence that traditional reinsurance pricing in some markets and on some programs remains a lot lower than the ILS market is willing to go.
Guy Carpenter said; “While it is too early to judge the broader impact of these changes, the last round of market-wide reinsurance price decreases were triggered in part by catastrophe bond competition.”
The broker said that rates declined across the majority of business lines and geographies at 1/1, although the decline moderated compared to the last three renewals.
Reinsurance capital continued to increase, after having been relatively stable in 2015, rising by 5% from 1st January 2016 to 1st January 2017, according to data from Guy Carpenter and A.M. Best.
Within this reinsurance capital pool, convergence or alternative and ILS capital grew by 10% so once again outpaced the growth of traditional reinsurance capital during the year.
Overall, as measured by the Guy Carpenter Global Property Catastrophe Rate-on-Line index, property catastrophe reinsurance pricing declined by 3.7% at January 1st 2017, as compared to near 9.0% a year ago, reflecting the moderating rate environment.
But with catastrophe bond rates declining by as much as 30%, the question lies as to where ceding companies will choose to put their risks in 2017 and beyond and whether the traditional market has the ability to sustain further price declines to fend off newly competitive ILS capacity?
Perhaps ILS capital has simply come down to the pricing levels traditional companies were offering on core U.S. property catastrophe risks anyway and this 30% price decline is not as dramatic as it first seems.
When you consider that the vast majority of large property cat reinsurance programs now contain add-ons like terror cover, according to our sources, it’s clear that the traditional market is giving away more rate anyway.
So when a catastrophe bond comes in 30% down but is not bundling (or giving away) terror or other risks like cyber, perhaps the decline seen in Q4 is ILS investor realisation that there is an opportunity to offer more price parity into the market without having to give away rate on unknown (or unknowable) peril inclusions.
The decline in cat bond pricing is not then as surprising as it may seem, at first glance, while similarly the fact that rate declines have moderated across the reinsurance market is equally expected. But yes, an additional decline in cat bond pricing may well have helped to stimulate further easing on traditional or collateralised layers too, providing the brokers with greater ammunition to push for decreases for their clients.
Peter Hearn, CEO of Guy Carpenter commented; “Although current renewals indicate that the decline in reinsurance pricing is slowing, this moderation was not surprising and the more interesting development may be the continued evolution of coverage and solutions to meet changing client needs.
“An abundance of available capital and improving analytics tools are essential components to create support for notable advances. An innovative mindset is the key to success in today’s marketplace as the increasing complexity of risk brings new levels of uncertainty.”