Insurance-linked securities (ILS) managers are expected to focus on new perils in emerging markets as the catastrophe bond market becomes saturated with interest.
This is according to a report from specialist publisher Clear Path Analysis market, which explained that ILS managers are further diversifying away from traditional cat bonds and beginning to focus on new perils and collateralised reinsurance.
This follows a record year for annual property catastrophe bond issuance, with a total of $8 billion of limit placed. In December last year, total catastrophe bonds on-risk stood at $24.3 billion, another record for the market, and an 18 percent increase over the prior year period.
The report explained that the traditional CAT bond market is becoming saturated with interest, driving investors and managers to look elsewhere for better returns.
Traditional cat bonds have been dominated by US hurricane risk, but institutional investors are increasingly looking to emerging markets for alternatives, according to the report. At present over 70 percent of the bond issuance features US hurricane coverage, representing a concentration of risk within the asset class.
Adam Beatty, business development director at Nephila Advisors, said: “With regards to the point about investors pulling back, we think it’s rational that investors who have sophisticated knowledge of the opportunities they face should increase or decrease their allocation to the asset class at various times to match that opportunity.”
The report also suggested that much of this impact will relate primarily to dedicated ILS funds rather than the institutional investors who have invested in ILS on a smaller scale.
“This can result in a relatively poor risk and return ratio, making things more difficult for those not already concentrated in ILS diversification,” said the report.
It added that natural catastrophe risks in China are expected to become more established.
“The ongoing and increasing economic development in China, combined with a growing rate of wealth, has led to a significant increase of insurance penetration,” it said. “One of the most notable conclusions from the report was the move towards new perils, including heatwaves, high temperatures and subsequent droughts.”
ILS, Insurance, Clear Path Analysis, Adam Beatty, Nephila Advisors, North America