In December last year, total catastrophe bonds on-risk stood at USD24.3 billion, another record for the market, and an 18% increase over the prior year period[ii]. The report suggests that ILS are seen as an appealing investment consideration for large institutions, with some reinsurers launching their own specialist boutiques. However, as the more traditional CAT bond market becomes saturated with interest, investors and managers are looking for better returns within the market.
This is among a number of topics debated in the latest Clear Path Analysis report released today. The ‘Insurance-Linked Securities for Institutional Investors 2015’, report examines another year’s activity across this asset class, looking at the transition away from traditional CAT bonds.
Dirk Lohmann, Chief Executive Officer of Secquaero Advisors commented
"The potential in emerging markets and the opportunity for diversification available to ILS Managers in specific areas, “In terms of weather related risks I would say flood, whether European or U.S., is likely to impact the most in the next 5 to 10 years and as a result models are currently being developed to measure that. Specific areas that are likely to become more relevant include natural catastrophe risks in China where they regularly experience earthquakes and typhoons.”
Marcel Grandi, Head of ILS Underwriting and ILS Life of Credit Suisse Asset Management, added,
“Until a couple of years ago life ILS was basically an unknown asset class but today interest in non-CAT bonds and private transactions is growing rapidly. Investors have an interest in this space because of the low correlation to traditional asset classes and the conservative risk profile with expected loss, e.g. below 1%.”
Given the capacity constraints in the catastrophe bond market, as well as increased market saturation and competition for traditional reinsurance programs, ILS managers have spent recent years at the forefront of innovation in an attempt to maximise their investable opportunities.
Michael Stahel, Partner at LGT Capital Partners, echoed previous sentiment on this trend,
“We are seeing the larger primary insurance companies, especially some of the U.S. primaries, starting to considerably shift their purchase for catastrophe capacity away from traditional reinsurance towards capital market investors.”
Traditional catastrophe (CAT) bonds have been dominated by U.S. hurricane risk, but institutional investors are increasingly looking to emerging markets for alternatives. At present over 70% of the bond issuance features U.S. hurricane coverage, representing a concentration of risk within the asset class.
Adam Beatty, Business Development Director at Nephila Advisors, said,
“With regards to the point about investors pulling back, we think it’s rational that investors who have sophisticated knowledge of the opportunities they face should increase or decrease their allocation to the asset class at various times to match that opportunity.”
The report also suggests that much of this impact will relate primarily to dedicated ILS funds rather than the institutional investors who have invested in ILS on a smaller scale. This can result in a relatively poor risk and return ratio, making things more difficult for those not already concentrated in ILS diversification.
Other areas that are expected to become more established are natural catastrophe risks in China where they regularly experience earthquakes and typhoons. The ongoing and increasing economic development in China, combined with a growing rate of wealth, has led to a significant increase of insurance penetration. One of the most notable conclusions from the report was the move towards new perils, including heatwaves, high temperatures and subsequent droughts. Spokespeople within the report suggest that such perils will, over the next 5 to 10 years, rise in emerging markets such as Russia, Ukraine and Kazakhstan.
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