The latest in our series of articles featuring leading figures from the insurance-linked securities (ILS) and reinsurance arena views on the markets prospects for 2015 features Asha Attoh-Okine, Managing Senior Financial Analyst of Insurance-Linked Securities, A.M. Best Co.
We asked participants for their thoughts and predictions about the ILS market, catastrophe bonds, collateralized reinsurance and reinsurance or catastrophe risks as an asset class as we move into 2015.
Asha Attoh-Okine is a Managing Senior Financial Analyst of Insurance-Linked Securities at insurance ratings specialist A.M. Best Co.
Asha covers the catastrophe bond and insurance-linked securities (ILS) market and gave us his and A.M. Best’s thoughts on where the catastrophe bond market is headed in 2015.
The response follows in full below:
The continued growth in the catastrophe (cat) bond market and the insurance-linked securities (ILS) space is evident by: (1) the acceptance of sponsors to issue cat bonds as a complement/alternative to traditional reinsurance; (2) the increase in assets under management of dedicated ILS investors; and (3) the benign insured loss environment over the past years.
A.M. Best expects to see an increase over last year’s record-breaking amount (approximately $8.8 billion) of cat bond issuances, as sponsors continue to take advantage of the relatively favorable pricing environment to meet the insatiable investors’ appetite for insurance linked instruments.
The growing market share of indemnity triggers over non-indemnity triggers during the past few years is expected to continue. Although A.M. Best expects the current composition of peak exposures– U.S. wind, U.S. earthquake, European wind, Japan earthquake and Japanese typhoon — to continue to dominate the cat bond market, there may be opportunities for adding new perils, such as floods, to the mix of hazards insured by the cat bonds. The potential for adding other insurance lines of business, such as the casualty arena, to the property cat business as part of the cat bond fray exists; however, this may take some time.
Given the cost efficiency and streamline documentation associated with private cat bond transactions, private cat bond platforms or “cat bond-lite” transactions will continue to flourish, with Florida named storms being the dominant peril. An additional factor facilitating the expansion of these types of transactions is the active participation of the insurance broker market and Florida-take out companies through the depopulation program of Citizens Property Insurance Corporation.
On the life/annuity and health front, A.M. Best expects to see an increase in activity from the two life/health related risk transactions averaged over the past years, as we see a tremendous interest by U.S. plan sponsors and life insurers to execute pension risk transfer deals. It would not be a surprise to see the emergence of longevity risk bonds in late 2015. There continues to be a growing interest in life-related risk transactions featuring mortality and pandemic risks through embedded value transactions as life insurers’ seek to monetize future profit on their current book of business.
Given the current regulatory debate on life insurer capital treatment for cat bonds, it will not be far-fetched to see more life insurers be part of the growing list of cat bond investors in the foreseeable future. This depends on NAIC modifications to the RBC capital treatment of cat bonds held by life insurers.
The continuous inflow of convergence capital will continue in 2015, although asset under management of specialized ILS funds will grow at a slower pace compared to previous years.
Although losses originating from natural perils have been benign over the past several years, massive insured losses due to catastrophe events is bound to happen sooner or later, causing cat bonds and other insurance linked instruments to trigger, thereby impacting investor returns. Significant insured losses will alter the landscape of the cat bond and ILS markets.
On a cautionary note, should massive insured losses due to a major cat event in 2015, the following questions/issues are offered for consideration: a) would there be a contraction of convergence capital; b) would ILS fund managers continue their current active participation in the primary insurance market; and c) what will be the impact on cat bond spreads and the cat bond secondary market. The outcome of these potential issues could alter the 2015 cat bond market landscape should significant insured losses occur.
Over the years, following the initial market disruption of the event, we have seen consistently that new capital enters the insurance market after a catastrophic underwriting event. This new capital helps to stabilize the market and address any capacity issues. However, the question remains, in what form will that new capital come? The next major catastrophe will be the first for most ILS fund managers. How they will react is uncertain, but if capacity issues arise, history has shown that capital will enter the market. A.M. Best expects this additional capacity is more likely to come from capital market solutions than the more traditional creation of “brick and mortar” insurance companies.
Our thanks to Asha Attoh-Okine for his insight and time.
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Artemis’ Q4 2014 Catastrophe Bond & ILS Market Report – A busy finish to a record year for ILS
We’ve now published our Q4 2014 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2014, looking at the new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2014. It also includes a brief review of the full-year 2014’s record issuance.