Cat risk: A test of resilience

By Peter Cripps

A spate of natural catastophes triggered payouts in the cat bond market, but this year's winners remain bullish, finds Peter Cripps

A spate of hurricanes, wildfires and earthquakes in the second half of 2017 brought to an abrupt halt a benign decade for the catastrophe bond and insurance-linked securities (ILS) market.

A violent hurricane season saw Harvey, Irma and Maria wreak havoc on parts of the US and the Caribbean.

Two earthquakes hit Mexico in September – the first, in Chiapas, killed 98, and was followed by a quake in Puebla that killed 370.

And California has been hit by a series of wildfires that destroyed real estate and caused fatalities.

Some estimates have already put the combined value of insured losses from these events at more than $100 billion.

The combination of disasters was sufficient to trigger payouts from at least 21 cat bonds – tradable instruments that allow insurers and reinsurers to cede risk from various perils to capital market investors.

Figures from Lane Financial suggest that the losses on cat bonds was approaching $1 billion as this article went to press.

"The major topic of 2017 was the return of significant cat losses in the US," observes David Bigley, chief underwriting officer and head of global catastrophe reinsurance at Sompo International, which was voted Best Structurer/Arranger for the third year running. In previous years, it won the title under the name of Endurance, but the Bermuda-based company was bought by Japanese insurer Sompo earlier this year.

While it is too early to put a final figure on the value of the losses, it will clearly represent a test of the resilience of the market, says Paul Schultz, CEO of Aon Securities, which was voted Best Broker, seizing the title from last year's winner, Willis Towers Watson.

"This was one of the largest tests for the market since its inception in the late '90s," he argues. "The market was very orderly and professional. There were no bad actors. Secondary trading was quite orderly."

As a result, confidence in the market remains high.

By early December, when this article went to press, 2017 had seen record issuance of $11.8 billion, the first time it had passed the $10 billion mark in a single year, according to data provider Artemis. This was significantly higher than the next biggest year, in 2014 when $9.1 billion was raised, and brings the value of cat bonds outstanding to $31 billion.

Although most of this capital was raised in the first half, before the spate of major catastrophes began, issuance has continued throughout the year.

"The losses, while significant, were not of the scale you would expect to scare investors away," adds Bigley. "There was concern over whether investors would be happy to stay in the space. The concerns about capacity were not played out – investors were happy to stay involved."

Schultz agrees: "The asset class continues to grow and be attractive to capital providers, the significant majority of which are pension funds. We continue to see increased allocations via renewals and new clients," although he concedes that some may decide to reduce their allocations in the wake of this year's events.

"We expect the asset class to grow and more capital to be available in 2018. To us, the events of recent months are another growth engine.

"Given the events of this year I think it's likely there will be much more emphasis on property peril, which will provide more opportunities," he adds.

He also expects to see more 'aggregate' transactions, which are triggered by cumulative losses rather than single events. These already account for some 40% to 50% of the bonds issued in the past 12 months, he says.

Sompo's Bigley predicts the market will also continue to expand into new geographies.

"There has been an acceleration of parametric cover in south-east Asia – we have looked at several this year," he says, adding that he views this as welcome diversification.

He also notes a recent trend towards diversification into areas such as pandemic perils and extreme mortality cover.