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A lot happened quickly in the first half of 2017 including record issuance, but should that define the market for the quarters and years yet to come? Tom Johansmeyer of Verisk Insurance Solutions investigates.
All I can say is, ‘whoa, that was an intense quarter!’.
Twenty-one catastrophe bond issuances resulted in $6.5 billion in fresh capital—all in the second quarter of 2017. Last quarter would have been among the largest issuance years in catastrophe bond market history, and when we look at the first half of this year, we have the largest full-year issuance total since market inception.
In reflecting on the issuance year so far, two thoughts come to mind. First, I think back to the final days of my hitch in the army. I drove up the East Coast from Georgia to Boston, marvelling at the fact that so much could be done in so little time. It was intense, fun, and certainly worth the effort—much like the catastrophe bond market so far this year (although, in fairness, that’s where the similarities to military service end). On that same long drive home, my mind also turned, unsurprisingly, to the crucial question I faced: what comes next?
That’s the question the insurance-linked securities (ILS) market should be asking now. We just saw a lot happen quickly, but should that define the market for the quarters and years yet to come?
More of the same
In many ways, 2017 has been more of the same, only bigger. Four sponsors accounted for 36 percent of first-half capital raised—and $2.2 billion of that came from big retrocessional transactions using industry loss index triggers. Five of this year’s sponsors are new to the catastrophe bond market, with one more debuting last year and returning this year. So, it’s still largely a market dominated by experienced sponsors. All but two transactions included US risk, as you’d probably expect.
Did anything really change? First, let’s not dismiss the new-sponsor dynamic entirely. While only a handful of first-half players were new, the total did climb from two in the same period in 2016. Next, let’s look at risk areas—in particular, Canada. Six catastrophe bonds included Canada in the first half of 2017, up from two in the first half of both 2016 and 2015 (Figure 1).
All but one in 2017 used Property Claim Services (PCS) Canada (all but one of those in an industry loss index trigger), and Canada was included in transactions representing more than $2.7 billion in total limit (none was standalone Canada).
Finally, the use of independent catastrophe designation continued to grow significantly (Figure 2). In the first half of 2016, four transactions ($675 million) used that approach. This year, the total increased to seven ($1.9 billion).
Even with those developments, however, catastrophe bond market growth remains one-dimensional—it’s still just more of the
same, only bigger. Now’s a good time to recall that question I asked myself while stuck in traffic on my post-enlistment drive home: what comes next?
A robust future requires multidimensional market growth, and that means more variety in the types of risk sent to the catastrophe bond market. Regional property-catastrophe expansion is an intuitive next step, but it offers constrained returns. My team continues to evaluate new markets, and we’re pursuing a few. But the world offers only so many alternatives with sufficient risk transfer appetite and natural catastrophe activity to be relevant to the ILS community. Specialty lines, on the other hand, provide a much richer growth trajectory. Based on significant market feedback, it’s pretty clear that manmade risks have the potential to broaden the market meaningfully.
Of course, this is what led us to launch PCS Global Marine and Energy at the beginning of the second quarter (with adoption beginning very shortly thereafter). Large global onshore risk losses and terror provide further opportunity for diversifying risks to enter the catastrophe bond market, but the transformative risk is likely to be cyber.
While most new risks—property catastrophe or otherwise—could chip away at the share of limit dominated by US property catastrophe, cyber is among the very few that could drastically change the market’s landscape. The cyber sector is still young, and it’s hungry for additional capacity. Uncovered risk remains quite high, and the implications of a major loss could be massive.
The combination of uncertainty and broad potential exposure suggests that it’s a matter of time until cyber rivals property-catastrophe for reinsurance and ILS market share. No, I’m not thinking it’ll happen in 2018 or 2019. It’s going to take some time. But in fairness, who among us contemplated a single-quarter catastrophe bond issuance level of more than $6 billion 20 years ago?
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