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The insurance-linked securities market is benefitting from growth in the private placement market and expansion into new geographies and perils.
“We continue to see the growth of the private catastrophe bond market,” said Bill Dubinsky, head of ILS at Willis Capital Markets & Advisory in New York. “With the private placements, there's a lot of innovation.”
“The private cat bond market has grown exponentially in recent years,” said Cory Anger, global head of ILS structuring at GC Securities in New York.
Total catastrophe bonds outstanding as of the end of the second quarter equal $23.47 billion, according to Aon Securities.
Smaller issues and a less costly and time-consuming process appeal to many potential catastrophe bond players.
“The growth of the private cat bond market is a function of sponsors with lower-limit needs seeking to access capital market investors to gain the same benefits as larger sponsors using 144A (public market) cat bonds,” Ms. Anger said.
Growing private placements' “ease of execution is definitely part of it, as is the ability to execute on a smaller notional limit,” said Paul Schultz, president and CEO of Aon Securities in Chicago.
The private market includes buyers looking to achieve coverage like a 144A- fully distributed catastrophe bond, but on a “light” basis, meaning less expense and time, Mr. Dubinsky said.
“What you're seeing with the private deals is some of the midsize clients that have expressed an interest to pursue this kind of strategy, coming to market in private deals versus the 144A deals,” said Mr. Schultz.
But private placements “could slow the growth of the 144A market,” said Gary Martucci, a director at Standard & Poor's Corp. in New York. “If you can do it quicker and cheaper and you are providing the collateral, that's going to be the way to go for a lot of the companies looking for limited amounts of reinsurance. The transaction costs tend to be lower, but then again so are the issuance amounts.”
New perils and locales also are helping the sector.
July's Panda Re Ltd. placement is the first cat bond covering Chinese perils, with $50 million of fully collateralized reinsurance against earthquake losses for sponsor China Property & Casualty Reinsurance Co. Ltd.
“We've certainly seen a couple of new types of perils come in, and China is an example of that,” said Mr. Schultz.
More recently, The National Railroad Passenger Corp., (Amtrak), secured $275 million in storm surge protection for just over three years with the PennUnion Re Ltd., 2015-1 catastrophe bond, Amtrak's first use of capital markets to secure coverage. The bond uses a parametric trigger involving myriad wind, water height and even earthquake measurements.
“We continue to look for the same advances we've looked for the last several years, which is new geographies and new perils that would be entering the market,” said Michael Pinsel, a partner at law firm Sidley Austin L.L.P. in the insurance and financial services group in Chicago and head of its property/casualty alternative risk transfer practice.
“We're always looking at China,” he said. “It's a very catastrophe-exposed geography, and it's huge. It will not be too long before they get much more active in the ILS market.”
The Panda Re bond is “a sign of what is to come, and it will come,” said Mr. Pinsel.
As reinsurance penetration grows in Asia and Latin America, “we believe it is a matter of time before these regions open up to alternative capital,” said Ms. Anger, citing the Panda Re bond structured and placed by GC Securities. “We see Asia as a high-growth region and look forward to bringing similar bonds to the market in the future.”
Geographically, the ILS market “more or less follows global premium in the global insurance and reinsurance markets and those shift gradually over time,” said Mr. Dubinsky.
“For any peril, the quality of data and investors' comfort with modeling are the key factors in determining whether that peril will be introduced into the ILS market,” said Mr. Pinsel. “New risks are harder to model. It takes a little time.”
Modeling advances may enable more flood-related ILS activity.
“I think that given the amount at risk, flood is a potential covered peril going forward,” said Mr. Martucci.
“I think we'll see more in the flood area,” said Mr. Dubinsky. “There's a lot of underinsurance in the flood area and, as new models become available, that's something we'll see quite a bit more of.”
Cyber risks also could be brought to the ILS market.
“There are always new perils in the works, and those are the ones I am most excited about,” said Mr. Pinsel, citing cyber risks as an example.
For now, the ILS market remains “a U.S hurricane-dominated asset class,” said Mr. Martucci.
Among outstanding cat bonds as of the end of August, U.S. perils accounted for 77% of total risks: 54%, U.S hurricanes; 21%, U.S earthquake; and 2%, other U.S. perils, Mr. Schultz said
The U.S. concentration of the ILS market “is not surprising given the U.S. is the largest insurance market in the world,” Ms. Anger said.
In their quest to respond to challenging market conditions, reinsurers are increasing their exposure to primary markets.