Top ILS Market Trends: Q1 2016

By Tom Johansmeyer April 11, 2016

We’ve put another record-setting quarter for catastrophe bond issuance behind us, with $2 billion in fresh capital coming to market. In some ways, the first quarter of 2016 offered more of the same, with no first-time sponsors involved in catastrophe bond issuance activity. However, the sheer volume of transactions shows that insurance-linked securities (ILS) have become strategically important to the global insurance and reinsurance community. The top trends in the catastrophe bond market right now indicate increased flexibility and a strong foundation for future market growth:

1. Familiar faces: Experienced catastrophe bond sponsors once again led issuance activity in the first quarter, cementing a trend we saw forming a year ago. It seems evident that cedents realize they have a range of strategic alternatives and are exploring their options carefully.

2. The index quarter: The first quarter of the year seems to have become the “industry loss index quarter.” Last year, four transactions featuring Property Claim Services® (PCS®) data resulted in $800 million in fresh capital—up 50 percent from the first quarter of 2014. This year, limit raised grew another 19 percent year over year, demonstrating to $950 billion, with two industry-loss-triggered catastrophe bonds accounting for $600 million. So far this year, nearly 75 percent of catastrophe bond capital with exposure to U.S. risk has used data from PCS, with nearly half using industry loss index triggers. However, PCS remains agnostic on trigger type because sponsors should use the most appropriate approaches for their strategic objectives.

3. Fresh thinking: The ILS market may have started with property catastrophe risk, but it’s clear that there’s plenty of appetite for other lines of business—as evidenced by our increasing work in both global terror and offshore energy (through the cat-in-a-box refinements. With as much as $900 billion in capital interested in entering the ILS space, transformational innovation is necessary. There’s no way an estimated $600 billion global reinsurance market can absorb that much capital organically in the near term. In addition to exploring new regions, our industry needs to look for new ways to bring original risk to market. Devising new approaches to trigger development, for example, will be crucial to future growth. We need to think differently to effect meaningful change in a market where capital is abundant and more wants to come in.

4. Growing the pie: Of course, the purpose of fresh thinking is ultimately to “grow the pie.” The amount of original risk being brought into the global reinsurance and ILS space needs to increase significantly, given the quantity of capital interested in the space. In addition to new lines and regions, we should also look for new sources of original risk in established markets. Corporates are starting to take a harder look at catastrophe bonds, particularly to find capacity for risks where they can’t currently get protection. And the disaster gap still looms in markets such as Florida and California. Finding a solution to market penetration at the original-insured level would have profound benefits at every link in the global risk and capital supply chain.

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.