18 // THE DISASTER GAP: HOW INSURERS AND THE CAPITAL MARKETS CAN HARNESS BIG DATA TO CLOSE THE GAP


The growth in issuers or the evolution of insurance-linked securitisations is being driven by:


– sources of capital; – counterparty diversification; – management of uninsurable risks; – cost and capacity limitations; and – solutions for seasonal or cyclical issues.


Some of the impediments to the asset class (and specifically the writing of risk in emerging economies) that we see being addressed include:


– improved risk insights; – simplification of the technical data; – an historical lack of preventative measures; – standardisation of the asset class; and – an historical lack of consistent ratings.


When BNY Mellon considers these, the growth in issuance we have witnessed in 2013 and the fact that the asset class has now tipped into the mainstream, we believe that total ILS could reach $150bn by the end of 2018.


We also believe $50bn of the $150bn will be publicly traded cat bonds, up from today’s $19bn (likely to be $20bn at the end of 2013).


We are therefore predicting a compound annual growth rate (CAGR) of 25% for ILS as an asset class and 20% for cat bonds as a subset of this. These compare to CAGR of 24% for the asset class as a whole over the past 13 years and 30% for cat bonds as a subset over the past nine years.


Willis Re recently outlined the potential effect of a further $100 billion of new capital flowing into the reinsurance industry over the next few years. The firm said it believed that such an influx had the potential to cause the displacement of as much as $30-40 billion of traditional equity reinsurance capital. They said that while it would be likely that as much as $20 billion of this would be given back to shareholders, up to a further $20 billion would be left as excess capital.


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