ILS A Record Volume Of
Catastrophe Bonds Highlights Increasing Competition In The Insurance-Linked Securities Market
By Maren Josefs and Gary Martucci
Sustained underwriting discipline and high standards of due diligence are needed if the successful alternative capital market is to maintain its credibility.
Through June 2014, Standard & Poor’s Ratings Services rated $3.4 billion of catastrophe bonds (cat bonds). This is the highest amount we have ever rated for the first six months of a year (see Chart 1). According to
Artemis.bm (a news, analysis, and data media service to the alternative risk transfer market), the outstanding insurance- linked securities (ILS) market has grown by $2.5 billion since the beginning of 2014 to $23.06 billion as of the end of June 2014. With the increase in supply, pricing levels are falling, and old (Aetna Life Insurance Co., Allstate Insurance Co., Chubb Corp., and Citizen’s Prop Insurance Corp.) and new (Great American Insurance Co., Everest Reinsurance Co., Sompo Japan Insurance Inc., and NIPPONKOA Insurance Co. Ltd.) issuers are taking advantage. The ILS market (which primarily consists of natural catastrophe [nat cat] bonds) is a small part of the alternative capital markets that are putting pressure on the traditional reinsurance market (see Chart 2). Alternative capital comes in several forms and sizes (see Table 1), most of which are private transactions that are not easily tracked. Estimates from Swiss Reinsurance Co. Ltd., Aon plc, and Goldman Sachs & Co. put this
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capital at around $50 billion, and expect this figure to double during the next five years. We believe that the alternative market will continue to grow but not at expected rates. Traditional reinsurers still offer advantages to their clients in terms of efficient execution, long-term relationships, reinstatements, and consulting services, and it will be difficult for alternative markets to compete with their distribution capabilities. Instead, we believe reinsurers should take
Chart 1: Standard & Poor's Rated Deals (Mil. $)
1,000 2,000 3,000 4,000 5,000 6,000
0 2009 © Standard & Poor's 2014. 2010 2011 2012 2013 2014 First-half Second-half
advantage of the available third-party capital and look for the most efficient way to manage their risk portfolios.
For some time now, the alternative market has had to turn capital away, or investors have had to reduce their allocation to this asset class because they couldn’t find profitable investment opportunities. Hence, the cedents’ demand for alternative market offerings needs to grow before this market can reach its full potential.
Global Reinsurance Highlights 2014
SHUTTERSTOCK / PATRICK FOTO
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