Catastrophe Bonds Hit Record $26.82 Billion
An impressive $7 billion of catastrophe bonds and similar insurance-linked securities [ILS] issued in 2016 took the outstanding cat bond market to the highest level since its inception, according to Artemis.bm.
A spokesperson said, “The Artemis.bm Deal Directory recorded over $7.05 billion of new catastrophe bonds in 2016, which, after accounting for deals that matured, takes the volume of in-force transactions at the end of 2016 to a staggering $26.82 billion, the largest the market has ever been.
“2016 issuance alone failed to break any records. But strong investor appetite for insurance and reinsurance linked investments, coupled with growing interest from sponsoring insurers and reinsurers, ensured the market achieved outright growth.”
Steve Evans, Owner and Editor of Artemis.bm, said, “2016 cat bond issuance failed to eclipse the previous year, but when looking at the health of the ILS market this new record size is a clear sign that cat bonds are here to stay and the ILS market will continue to grow.”
“The catastrophe bond and ILS asset class, which largely consists of specialist insurance-linked investment funds allocating third-party capital to back insurance or reinsurance business, continues to gain acceptance and expand its footprint within the global market, which Artemis believes has taken it to roughly $80 billion of total reinsurance market capital.”
“In 2016 the ILS market saw steady growth, but at the same time an impressive burst of expansion into new risks, geographies and classes of both insurance and reinsurance business.
“This is a trend Artemis expects to continue, as investors increasingly learn to appreciate the efficiency and diversification benefits of the asset class and participants become increasingly specialised.”
Mr. Evans said, “Investments in property catastrophe and other classes of insurance or reinsurance risk are increasingly seen as an attractive alternative asset class by institutional investors such as pension funds and sovereign wealth managers.
“As the ILS market has matured this interest has increased and now the sector is finding new ways to access risk and support investor demand.”
“With the reinsurance market under significant pressure from a series of headwinds, including the effects of an abundance of traditional and alternative capital, many industry observers and analysts suggested that the catastrophe bond and ILS space would struggle to continue growing.
“But as the Artemis Deal Directory reveals, this simply hasn’t been the case, and while traditional re/insurance business might not currently be as profitable as it once was, the catastrophe bond and ILS market remains a viable and attractive return driver for investors.”
Mr. Evans said, “The continued growth of ILS and cat bonds remains a threat to the traditional reinsurance business model, but increasingly insurers and reinsurers are embracing this alternative form of capital both for their risk transfer and underwriting needs.
“At Artemis we expect the efficient capacity from the ILS market to play an increasingly important role throughout the industry, and continue to disrupt traditional business models in insurance and reinsurance.”
“The world today is more interconnected than ever before, and as technology and innovation threaten to reshape the fundamentals of the risk transfer landscape, ILS features and capital have a very important role to play.
“Emerging risks like cyber and terror, along with the forecasts that climate and weather-related disasters will become more frequent and severe, highlight the need for a broad and diverse risk capital base, which the ILS market appears willing and able to provide.”
Mr. Evans concluded by saying, “The disruptive effects of capital markets structuring, efficient third-party capital and technology innovation look set to converge, resulting in a more efficient model for reinsurers and risk transfer, we believe.
“The volume of capital that third-party and institutional investors will contribute to the global reinsurance market, increasingly directly through ILS structures, will continue to rise. We anticipate further growth in years to come, both in cat bonds and the total amount of capital market money at play in the reinsurance market.”
