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Early redemption clauses proliferate, reflect higher cat bond returns: Plenum


Almost all of the recently issued catastrophe bonds have featured early redemption clauses, to allow the cedant an option to redeem the bonds and close the coverage earlier than scheduled, which specialist ILS investment manager Plenum Investments says is a reflection on the higher returns in the cat bond market right now.

Reinsurance rate increases at renewalsCedants have largely elected to add an early redemption clause to their recent catastrophes bonds, allowing them the option of early redemption against the payment of a premium, Plenum Investments explained.

In market phases when catastrophe bond risk premia, or rates, are lower, such as we’ve seen in recent years, cedants tend to choose to lock in the reinsurance or retrocessional coverage that bonds provide for as long as possible.

Plenum says that it now sees the opposite development, as early redemption clauses are proliferating in recent cat bond deals.

Favourable, or otherwise, reinsurance market buying conditions drive these decisions for cedants, as they look to ensure they aren’t locked into pricing that is above where they feel reasonable costs lie.

Plenum explains that this shows “the costs for reinsurance via CAT bonds have risen to a level that is painfully expensive for some cedants .”

As a result, the option of being able to shorten the term of reinsurance or retro coverage that a cat bond provides has become more attractive to the cedant community at this time.

Plenum Investments believes that this is “a further indication that the CAT bond market currently offers highly attractive compensation for the risk assumed from an investor’s point of view.”

In fact Plenum believes the returns possible in catastrophe bond investments are right now as high as they have been since 2012.

That suggests an opportune time to enter the market for investors, especially as issuance continues to flow despite the higher pricing being commanded.

With analysts suggesting that higher reinsurance market pricing is set to last a while, the prospects for catastrophe bond returns look very positive, once the ongoing creep from past loss events is behind the market.

Most cat bonds do include some kind of redemption option within their terms, but it is clear that the terms have improved over recent years and so become more useful to cedants as well.

It’s all part of ensuring flexibility of coverage for the customer, which is a good thing and something we’re likely to see more of as reinsurance becomes increasingly responsive to customer needs.


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