Top 5 Cat Bond Market Trends in Q1 2015

By Tom Johansmeyer April 8, 2015

The ongoing shift in underlying market trends over the past year shows how dynamic the catastrophe bond sector has become. Innovation, expanded geographical reach, and increases in market participation continue to shape the catastrophe bond market, opening more opportunities to both sponsors and investors.

cat bond lite

The five key trends in the catastrophe bond market right now indicate increased flexibility and a strong foundation for future market growth:

1. Seasoned pros: Experienced catastrophe bond sponsors led issuance activity in the first quarter, with a first-time sponsor completing one of six transactions. While that could be a temporary hiccup, it may signal that cedents realize they have a range of strategic alternatives and are exploring the full range of available choices, particularly with reinsurance rates still under pressure. The second quarter, which includes the run-up to the June 1 renewal, will more likely tell whether a shift in new market entry is in progress

2. Cat bond lite continues: Cat bond lite innovation in 2013 led to rapid adoption in 2014, with $242 million in publicly announced transactions completed. By the end of February 2015, the cat bond lite sector was already 80 percent of the way to last year’s total, and several “lites” have yet to renew. Several factors should be considered in watching the market evolve. The use of cat bond lites by cedents, traditional reinsurers, and even corporates has been discussed across the market. In conjunction with the possible growth of the cedent base, new risk areas (for example, Canada comes to mind) could provide greater opportunity for market expansion.

3. Index uptick: Use of industry loss index triggers spiked in the first quarter of 2015, with prior users of the PCS Catastrophe Loss Index returning to the capital markets with that approach. Fifty-eight percent of the capital raised last quarter involved the use of PCS data, with 37 percent using an industry loss index trigger. Use of PCS data climbed 50 percent year over year for first-quarter issuance. Of course, this is the result of a slow-moving first quarter. Sponsor activity will also likely include indemnity trigger use in the second quarter. PCS remains agnostic on trigger type, as sponsors should use the most appropriate approaches for their strategic objectives.

4. New market entry: While veteran sponsors dominated the quarter’s issuance activity, talk across the market focused on the need for new risks and regions. This is clearly a significant concern for the market, particularly as investors seek to diversify. ISO and PCS have several initiatives under way to introduce tools for new risk areas and lines of business, and we encourage any suggestions you may have. It’s clear that new indexes will be crucial to unlocking ILS market expansion opportunities

5. Under pressure: As expected, the January 1, 2015, reinsurance renewal brought more downward pressure on rates, in large part because of another quiet catastrophe year. And again, that’s led to tighter spreads in the catastrophe bond market. Declining pricing and increased competition created an opportunity to evaluate cover more thoroughly, which could constrain catastrophe bond market growth.

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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.