PCS Pre–Monte Carlo Briefing

By Joe Louwagie September 10, 2014

“Lisa_SayeghThe unofficial start of the January 1, 2015, reinsurance renewal season is almost upon us. In a few days, the global reinsurance industry will descend upon Monte Carlo for the annual ritual of 30-minute meetings in cafés and hotel lobbies and on sidewalks that will ultimately shape risk transfer for the coming year.

While the third quarter has been quiet, 2014 has given the industry plenty to discuss, particularly in regards to the insurance-linked securities (ILS) sector. Cat bond issuance surged 40 percent from the first half of 2013 to the first half of 2014, setting yet another record at $5.7 billion. First-time sponsors have flocked to the market, and the use of cat bond lite structures has gained traction.

When you’re looking for a table at Café de Paris for your next meeting — always a challenge — here are a few of the year’s top themes for you to think about:

1. Shifting U.S. catastrophe activity: The largest losses have historically come from tropical storm and earthquake events, with perils such as wind, thunderstorm, winter storm, and wildfire considered attritional. That’s changing. Convective events have become more severe over the past ten years, and now pose threats to programs that may not have been designed for those risks. A closer look at historical convective activity could provide actionable intelligence for risk and capital management.

2. Low losses, large impacts: U.S. catastrophe losses reached only $9.5 billion for the first half of 2014, with Canada reaching only C$650 million. However, the nature of the underlying events did have earnings implications for some in the industry, showing that catastrophe risk management involves more than headline-grabbing storms. The catastrophe events that erode retentions also warrant attention. In the first half of 2014, eight of the 20 events PCS designated didn’t reach the resurvey threshold of $250 million.

3. The “name game”: Some perils lack an independent means of measurement to use for catastrophe designation. Named storms and earthquake magnitudes don’t have equivalents in wildfire, hail, thunderstorm, and winter storm. PCS catastrophe designation can help, as it provides an independent view of what constitutes a catastrophe event. Four sponsors used PCS for catastrophe designation in indemnity-triggered catastrophe bonds in the first half of 2014 — after just three sponsors did so in all of 2014. The approach could also be effective for collateralized reinsurance transactions.

4. Increased adoption: Six sponsors came to the catastrophe bond market for the first time in the second quarter, raising approximately $1.6 billion. Two sponsors sought protection for non-North American risks, and several came from the Florida market. In the first half of 2014, three first-time sponsors using data from PCS in their triggers raised $750 million.

5. Cat bond lite: The use of cat bond lite platforms has gained considerable traction this year. Sponsors have completed ten transactions across three platforms, raising $242 million. Half used the PCS Catastrophe Loss Index, with 20 percent using indemnity, 10 percent using parametric, and 30 percent undisclosed. While this trend is still in its early stages, PCS will watch it closely as the ILS community evaluates the effectiveness of cat bond lite for flexible risk and capital management.

Download the latest PCS cat bond market update now >>


Joe Louwagie

Joe Louwagie is assistant vice president, Property Claim Services (PCS). PCS is a Verisk Analytics (Nasdaq:VRSK) business.