Record volume of cat bonds to the capital market in 2021

Hannover Re has reported record catastrophe bond volumes transferred to capital market investors in 2021. In total, the reinsurer says it transferred $2.7 billion of cat bond issuance across 11 bonds, up from $1.6bn in 2020.

It facilitated the placement of covers against losses from a range of natural disasters, including floods, storms, earthquakes and wildfires. The volume of the individual catastrophe bonds ranged from $30 million to $575m.

“The demand from our clients for alternative risk covers was stronger last year than ever before,” said Silke Sehm, a member of Hannover Re’s executive board.

While demand for cat bonds as alternative risk coverage has traditionally come from the insurance sector, other industries are also increasingly looking to place insurance risks with investors, according to Hannover Re. Last year, it helped companies in the energy, logistics and technology sectors.

“More and more companies outside the insurance sector, such as Prologis or Sempra Energy, are deciding in favour of risk transfer to the capital market, and Hannover Re so far has managed to win a large portion of these mandates,” said Henning Ludolphs, managing director retrocession and capital markets at Hannover Re.

“We see a sustained trend towards demand for ILS covers going beyond the insurance sector and expect other companies to tap into the advantages of such risk transfers.”

The company also sees increased potential for collateralised reinsurance, with Hannover Re establishing itself as a leading fronting company in recent years. In 2021 it expanded the volume of transactions facilitated, with insurers and investors concluding private, non-tradable risk transfer transactions backed by collateral held in trust.

“Collateralised reinsurance will continue to form a significant part of the ILS market that keeps on growing,” said Ludolphs. “Investors and cedants find this segment of the ILS market attractive owing to the broader range of risks and on account of its more straightforward contractual structures. Collateralised reinsurance is a success story, and we intend to play a prominent role in the next chapter just as we have to date.”

Up to two-thirds of the volume in the ILS market will likely originate from collateralised reinsurance, the reinsurer notes, with the volume virtually unchanged in 2021. For 2022, Hannover Re expects to see an increased market volume for both catastrophe bonds and collateralised reinsurance.

In total, it anticipates a record volume of over $100bn for the ILS market in 2022, up from around $95 billion in 2021, excluding securitisations in the area of mortgage financing.