Despite a record issuance year, catastrophe bonds sponsored by individual insureds have been noticeably absent.
2014 set the record for the largest amount of non-life/health 144A catastrophe bond issuance in a year with just over $8.0 billion of issuance, thumping the prior record of $7.2 billion set in 2007. With pricing at historical lows and terms & conditions continuing to mirror traditional reinsurance (72% of catastrophe bonds used indemnity triggers in 2014, while only 30% used such trigger in 2007), the product has continued to become a viable alternative to a growing number of buyers. 2014 saw six new sponsors come to market totaling $1.6 billion of issuance, the largest amount of capacity issued by new sponsors since 2007.
However despite this positive momentum, the issuance from individual insureds (e.g. corporates, municipalities, utilities, etc.) in 2014 was… zero. This came as quite a surprise to most market observers, especially after the success of the MetroCat Re transaction sponsored by the New York MTA in 2013 following the losses the New York MTA suffered from Superstorm Sandy.
On the plus side, cat bond capacity can potentially work well for large programs in peak zones and specifically to address business interruption for certain sorts of risks.
But many of the roadblocks that have made individual insured sponsored cat bond issuance rare continue to persist today, including:
- Unless a company has significant peak zone exposure, comparison of standalone cat pricing to an all risk policy can be challenging
- Primary brokers have had far less experience with the product and may feel less confident to provide it as a result (and in particular to discuss basis risk)
- UNL cover has historically been more of a challenge for individual insureds. Also, the quicker commutation investors require presents a problem
- Reinstatements are generally not available
- There are tricky but solvable tax and regulatory issues for individual insureds (especially where an individual insured lacks a front or is in a regulated sector like defense or utilities)
Solutions exist to remove some of these impediments preventing individual insureds accessing ILS capacity directly. Increased investible capital has led dedicated fund managers to look elsewhere beyond property catastrophe reinsurance. In addition, the lower cost of this capacity will continue to force risk managers to consider implementing this protection as a portion of its overall risk transfer strategy.
As we move into 2015, what can make ILS and related solutions more relevant and spur issuance from corporate sponsors? Solutions need to be focused on the unmet client needs this sponsor face. One critical issue that the capital markets could explore is providing protection for pandemic business interruption. The Ebola scare experienced in 2014 should drive home just how real the possibility is of having significant BI losses from a type of health scare. Airlines, hotels and casinos are just a few of the mostly exposed industries to such an event. Another topical issue where ILS could provide solutions is for cyber losses. While providing protection from cyber on a standalone basis probably will not work, investors can support insurer sidecars to ultimately support more capacity.
For the latest insurance-linked securities market overview from Willis Capital Markets & Advisory, click here: the report, Reaching New Heights, provides detailed breakdowns, charts and insight into the ILS market as at January 2015.
Guest blogger Brad Livingston is a Vice President with Willis Capital Markets & Advisory in New York. He has experience working on 20 ILS transactions, raising over $4 billion in capacity for global reinsurance and insurance clients.