Speed and simplicity ensure further success for ILS

The cat bond market continues to grow apace, with first half issuance reaching $4.5 billion, according to figures from Aon Benfield Securities, and continued strong interest from cedants and investors alike. But while growth has been strong over the past 18 months, there is potential for still further issuance, particularly among smaller and mid-sized cedants.

"CATstream can offer a solution to cedants whether they are looking to place a layer or a whole programme, helping them to react to specific market needs throughout the cycle."

Issuance hurdles associated with transactional time and cost have acted as an impediment, but as the market has grown so too has more broad-based interest in the potential of the cat bond market. CATstream aims to satisfy this growing demand.

As Paul Schultz, CEO of Aon Benfield Securities explained, CATstream was launched to satisfy client demand to “broaden access to the cat bond market”. It aims to enable cedants that could not previously justify a stand-alone issuance, or were reluctant to go down the path of negotiating all their own documentation to access the cat bond market in an expedited and simplified manner.

“Some clients are more comfortable with the traditional reinsurance market due to their familiarity with traditional solutions and the speed of inception of transactions. Our intention was to create a standardised set of documents that clients can use to enter the cat bond market more easily, enabling them to bring transactions to market faster and close transactions sooner—all within a simplified framework,” he said.

Schultz said that the CATstream product would likely prove attractive to a range of clients, from small and medium-sized insurance companies, through to captive insurers and even corporate clients. “The possibility of transacting at a smaller notional value has the potential to open up a new client base,” he explained. “We are hopeful of new clients coming to market in response to this product.”

Clients will be able to bring tailored products to market more quickly thanks to Aon Benfield Securities having gone through the process of creating the infrastructure and documentation for the transaction in advance, expediting matters for clients. “It isn’t only smaller clients that can benefit from CATstream—the product can also be tailored for larger players that want to come to market more quickly using an established outline.”

As he explained, CATstream can offer a solution to cedants whether they are looking to place a layer or a whole programme, helping them to react to specific market needs throughout the cycle. Schultz added that the product can also be used on a “technical basis—as a means to quickly bridge a gap in a client’s portfolio”.

Schultz said that clients can expect significant savings thanks to transactional documents being pre-negotiated with leading third party vendors, adding that clients can also expect to benefit from “an opportunistic cost saving”. As he explained, thanks to Aon Benfield Securities having taken the lead on the negotiation of the contract template, management can avoid the time spent negotiating bonds with individual companies involved in the structuring and modelling of such transactions.

CATstream is broadly structured to accommodate indemnity loss transactions as well as index triggers, leveraging the capabilities of PERILS and PCS for index-linked transactions in Europe and the US respectively. This enables CATstream to be “as broad as possible”, offering bond structures that can satisfy the full gamut of client needs. Presently, CATstream targets US and European perils—which account for the lion’s share of global issuance—but Schultz said that in the future there was potential for iterations of CATstream to address other geographies, as interest in cat bonds deepens in those regions.

Complementing these capabilities are relationships with all three of the major catastrophe modelling agencies—AIR Worldwide, EQECAT and RMS—alongside capabilities delivered by Aon Benfield’s own catastrophe modelling team, Impact Forecasting. Together these capabilities are helping to create a broad-based platform that will enable clients to thoroughly analyse the underlying peril and the transaction. Again, clients are able to draw upon Aon Benfield Securities’ deep, existing relationships with the modelling firms in order to streamline and simplify the cat bond process.

Schultz said that Aon Benfield Securities is confident about the prospects for growth among small to mid-sized cedants, with the company fielding considerable interest from insurers keen to explore the potential of the cat bond market.

“Historically, it has tended to be our larger clients that have accessed the cat bond market because intuitively it made sense for clients purchasing say $1 billion of property cat reinsurance to explore $200 to $300 million of diversification through the capital markets, while for clients purchasing less than $400 million of overall reinsurance coverage it made less economic sense,” he said.

However, CATstream aims to change the calculus, delivering a mechanism whereby Aon Benfield Securities helps bear some of the fixed costs embedded within the issuance process, enabling smaller cedants to access the cat bond market.

“We are bullish about the ILS space and the capacity coming in. We decided to make an investment in CATstream and to bear the associated costs in order to make cat bonds available to clients on a variable cost basis. We believe that over time having a product that broadens access to the ILS market for clients will be well received by the marketplace.”

Simplification will also help to drive secondary market trading, with familiarity with the documentation and good transparency “all helpful in creating greater liquidity. Transparency is critical on both sides of the trade”, explained Schultz.

Schultz said that the wider simplification of transactions will help to drive further growth in the cat bond and the broader ILS market. He said that as the scope of the market—by peril and geography—grows, so too will the need to deliver products and ideas that can compete with the traditional reinsurance market.

“To continue to grow, the cat bond market needs to attract new types of clients, deliver access for cedants and investors, and continue to drive innovation around peril and structure-type.”

Schultz sees healthy competition in the ILS and reinsurance space, adding that the ILS industry needs to work to build meaningful relationships with the market and to “develop relationships right across pricing and market cycles”. Products such as CATstream will help to create these connections, while delivering valuable capabilities to an increasingly diverse segment of the insurance market. 

Paul Schultz is CEO of Aon Benfield Analytics. He can be contacted at: paul.schultz@aonbenfield.com