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PCS 2013 Catastrophe Bond Market Update: Trend Tracking

The growth and maturation of the catastrophe bond market in 2013 provide a sense of its direction in 2014. Rather than continued issuance increases for common risks (such as U.S. wind), it appears that the market has developed a much larger platform for growth, thanks to the underlying diversity in issuance activity in 2013. Midmarket sponsors showed signs of potential (in Florida, for example). And new structures that meet the specific needs of unique cedents (such as MetroCat Re) revealed the potential for continued innovation.

1. Continued issuance growth

Increases in traditional issuance activity and participation from new sponsors and regions appear to have made high levels of issuance the new norm, regardless of whether 2014 turns in record-breaking results. Innovation will also contribute to future market growth as stakeholders continue to seek new ways to improve risk and capital management through techniques that resonate with investors.

2. International diversification

In 2013, catastrophe bonds covering risks in Turkey, Japan, and Australia came to market, representing an increase in diversification. U.S. risks continued to dominate, but Canada and Europe featured more prominently than in years past. Appetite for diversifying transactions appears to be on the rise. In fact, the market has responded favorably to PCS’s plan to expand into South Korea — working closely with the Korean Fire Protection Association (KFPA). Establishing the potential for index-triggered catastrophe bonds in the new regions should contribute to future market growth. PCS and the KFPA expect the service in South Korea to launch in 2014. PCS is committed to helping local insurance industries around the world access industrywide catastrophe loss data. In addition to helping them with catastrophe response, claims payment benchmarking, and loss reserving, such efforts should help open new opportunities for risk transfer to the capital markets.

3. Deeper midmarket penetration

The prevalence of smaller deals in 2013 represents an important step forward in efforts to engage midmarket cedents. Ahead of the June 1, 2013, reinsurance renewal, catastrophe bonds were a hot topic among Florida cedents, two of which entered the market. And the emergence of new “cat bond lite” platforms could help further engage smaller potential sponsors. Depending on risk profile, index transactions may be easier for this sector to execute, given the lack of underwriting, ease of understanding, and the elimination of concerns about a sponsor’s data. Those factors could facilitate further midmarket penetration.

4. Continued innovation

“Cat bond lite” platforms were just the beginning in 2013. Some sponsors looked at existing resources in new ways. For example, Allstate used only personal property and auto estimates from PCS in Sanders Re. And market participants continue to explore new ways to use data from PCS and other sources to improve risk and capital management. Further, new projects are in the works. PCS and the Cayman Islands Stock Exchange, for example, are working on an exchange-traded risk program that would bring cedents and markets together in a “listed ILW” environment.

5. Indemnity discipline

The increased use of indemnity triggers has led to greater adoption of PCS catastrophe designation for those deals. The trend should continue, especially as sponsors become more ambitious in transaction structuring. Also, catastrophe designation would make it easier for experienced sponsors to include perils other than U.S. wind and earthquake in indemnity-triggered catastrophe bonds.

Tom Johansmeyer

Tom Johansmeyer is Assistant Vice President – PCS Strategy and Development at ISO Claims Analytics, a division of Verisk – insurance solutions. He leads all client- and market-facing activities at PCS, including new market entry, new solution development, and reinsurance/ILS activity. Currently, Tom is spearheading initiatives in global terror, global energy and marine, and regional property-catastrophe loss aggregation. Previously, Tom held insurance industry roles at Guy Carpenter (where he launched the first corporate blog in the reinsurance sector) and Deloitte. He’s a veteran of the US Army, where he proudly pushed paper in a personnel position in the late 1990s.

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