6 CATASTROPHE BONDS


VIEW FROM BOTH SIDES


A


The catastrophe bond market is rapidly developing to engage a broader universe of participants. Michael Popkin and Rick Miller, managing directors—co-heads of ILS


at Jardine Lloyd Thompson Capital Markets discuss the changing dynamic in the sector.


N


ot long ago, only a small handful of large multinational entities came to market. On the investor side, most


of the managers had a few fairly restrictive mandates. We have seen significant changes on both fronts, which lead us to feel that we are still closer to the start of the overall convergence of traditional and alternative reinsurance markets than many people think.


THE CEDANT’S PERSPECTIVE The number of cedants coming to market has grown over the last 18 to 24 months for a whole range of reasons.


1. Success begets success. As more cedants have come to market, other cedants become more comfortable. With many cedants having been repeat issuers, it has become apparent that the cat bond market is here to stay.


2. The ability to execute lower coupon


transactions has also opened up the range of risk that can be transferred more efficiently to the capital markets investors.


3. The growth of private placement cat bonds, with their considerably lower frictional bond


INTELLIGENT ILS JUNE 2014


building costs, has made the all-in cost of alternative capacity increasingly competitive with traditional placement. Moreover, it has allowed smaller transactions to get done, thereby opening up the capital markets to more cedants.


4. As the capital markets have continued to grow, cedants have begun to see insurance- linked securities (ILS) funds as long-term partners. With the ILS funds developing more flexible mandates (more on this below), it has meant that ILS funds and cedants can expand the relationship beyond just a cat bond


“The ability to execute lower coupon transactions has also opened up the range of risk that can be transferred


more efficiently to the capital markets investors.” transaction. The potential for an expanded


relationship becomes more profound around a private placement


transaction given the


greater level of dialogue between cedant and investor. By definition, private placement cat bonds are more customised and a more collaborative


process among the investors


and the cedants. These deals allow cedants to transfer interesting, and often diversifying, risks to investors.


5. As the capital markets move from the fringe into the core of reinsurance risk transfer, cedants and their brokers have begun to recognise that a well-balanced reinsurance programme ought to consider a component for both markets. Traditional reinsurance and capital markets will both have their place in a reinsurance


programme. The


diversity of sources of capacity for cedants is valuable from a pricing standpoint as well as from an overall enterprise risk management perspective.


6.We are seeing more innovation in the markets, such as more flexible structures that better mimic traditional reinsurance.


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