It’s been a trying year for the insurance-linked securities and catastrophe bond market as participants have had to come to terms with numerous large catastrophe events, some of which have resulted in losses to investors in specific cat bonds, a market slow down while it digested the events and the much discussed change to risk models. All of this has added up to a volatile environment, but how has the market really moved in terms of price shifts and risk appetites?
A new paper published by broker dealer Lane Financial LLC titled ‘Tail Tales, or Shifts in Market Price and Risk in a Volatile Year‘ attempts to cut through some of the hype and show how the market has reacted to the numerous catastrophic events. The market has shifted and adjusted in price throughout the year and the paper is more than simply a look at those price adjustments, it also tries to show how risk appetites change or conversely how stable they are.
The paper looks at the risk profiles and prices of a market representative portfolio of unimpaired ILS and utilises data from risk modeller AIR Worldwide. The paper discusses remodelling of ILS and how this can be used to help portfolio construction and diversification, there’s some really interesting insight which is worth reading here.
The study Lane Financial undertook analyses the basket of market representative ILS to show how the portfolio changed from February to August and then again at September of this year. It shows that secondary market prices hardened as the yield rose by 42% from February to August and that as the market priced upwards it was taking on less risk (evidenced by research into multiples).
The study and resulting paper also references changes in the market as bonds mature and new issuances come into the mix, as well as seasonality such as hurricane season and how it affects premiums and pricing.
It’s a very detailed analysis of the market shifts experienced this year and we recommend you visit the Lane Financial website to register and download a copy of the full report.