Stephen Moss, Director of Capital Markets and Ben Brookes, Vice President (VP) of Capital Markets at catastrophe risk modelling firm RMS, in an interview with Artemis, recently discussed notable trends in the insurance-linked securities (ILS) space throughout 2016, and what might be in store for the market in the year ahead.
The two discussed the continued rise of collateralised reinsurance, increased demand for parametric solutions, and also the influence of the lack of hurricane activity and what this might mean for models in 2017.
Looking forward, the pair noted potential for heightened catastrophe bond issuance as the market searches for a pricing floor.
What notable trends did you see in the ILS and catastrophe bond space in 2016?
Stephen Moss: On the collateralised reinsurance side of the market, we see consistent and strong growth. More funds are becoming directly involved in Lloyd’s SPS structures and industry heavyweights such as Hannover Re and Tokio Solution are providing highly efficient transformation services to facilitate greater risk transfer.
At the same time, this opportunity brings with it a burden for funds as they expand into a domain historically reserved for global reinsurers. ILS funds now have a greater need for analytical capabilities as they get to grips with more complex exposures and contract terms – as a result we have seen growing demand from funds for more advanced analytical solutions.
Were there any specific features of the ILS sector that you feel flourished during 2016?
Stephen Moss: We are seeing ongoing appetite for parametric instruments, both as hedging instruments and investment opportunities proper. Last year we released our Cat-in-a-Box online tool and over the year we had consistent demand for this kind of capability. We also saw parametric initiatives such as New Paradigm’s IPP and Hurricane PM gain traction, pushing the boundaries of what the market will accept in terms of direct and industry loss protection.
Despite catastrophe losses increasing in 2016 when compared with more recent years, loss activity has remained fairly benign, could this have any impact on models for certain exposures in the near future?
Ben Brookes: Hurricane Matthew provided a timely reminder that this market is designed to cover the extremes of risk, with pre-landfall estimates at one point reaching north of $30 billion. As the storm stalked the Florida coast staying just off-shore and the market collectively breathed a sigh of relief, the talk turned to how much longer the Florida hurricane drought can continue, and how another benign season might be reflected in the 2017 model updates.
We are seeing signals that we might now be in a prolonged period of low hurricane activity, and when our updated modelled rates are released this year, there’s a real possibility we will see a medium term view that is lower than historical averages in some key regions.
Looking forward to the year ahead, how do you feel the catastrophe bond and ILS market will fare?
Ben Brookes: The indications are that the cat bond market will remain the smaller component of growth in alternative capital. But, as prices continue to decline, at some point the question of liquidity could yet reverse this trend with a pricing floor across the market providing a boost to cat bond issuance, given the advantages such products afford investors.
Will the balance of demand change this year? We’ll have to wait and see, but the huge $1 billion+ of issuance from XL Catlin in recent weeks could be an important signal of that shift beginning to happen.