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Flood, wildfire cat bonds exhibit growing interest in alternative coverage

Flood, wildfire cat bonds exhibit growing interest in alternative coverage

Recent catastrophe bond placements covering perils ranging from flood to wildfires mark an expansion for the insurance-linked securities market, both in terms of risks covered and customers accessing the market.

Traditionally seen as an alternative reinsurance coverage for insurers and reinsurers, ILS products now are in some instances being used by government agencies and other insurance purchasers as sources of tailor-made coverage and alternative capacity.

Investors as well as corporate sponsors are helping drive the market in new directions and to new highs, sources say.

The increased activity comes about five years after the 2013 launch of a $200 million catastrophe bond that covered the New York Metropolitan Transit Authority from storm surge and was one of the first bonds bought by a primary policyholder in the United States.

“We expect there could be additional corporate sponsors that haven’t yet accessed the market that could utilize this marketplace by year-end,” said Cory Anger, New York-based global head of ILS origination and structuring at GC Securities, a division of MMC Securities L.L.C. “We’re very excited to see continued growth.”

In the past two weeks, the ILS market completed two major deals involving nontraditional customers.

San Francisco-based Pacific Gas and Electric Co. bought a $200 million cat bond, effective this month, to protect it from losses related to wildfires caused by its electric grid. Cal Phoenix Re Ltd. (Series 2018-1) “is the first indemnity-triggered corporate bond,” said Ms. Anger, whose company placed the bond.

And effective Aug. 1, the Federal Emergency Management Agency secured $500 million in coverage, which ultimately protects FEMA and the National Flood Insurance Program that it administers.

FloodSmart Re (Series 2018-1), the $500 million cat bond ultimately benefiting FEMA/NFIP, also placed by GC Securities, “is the first indemnity-triggered flood deal for the U.S.,” Ms. Anger said, adding that “prior U.S. flood-exposed catastrophe bonds have been parametrically-triggered.” The deal is structured to cover, for a given flood event, 3.5% of losses between $5 billion and $10 billion, then 13% of losses between $7.5 billion and $10 billion.

“FEMA accessing the ILS market for the first time demonstrates how developed countries in addition to developing countries can utilize the risk transfer market to de-risk their balance sheets and protect taxpayer dollars,” Ms. Anger said.

The FEMA bond was the product of a more robust and advance market, said John Andre, managing director for A.M. Best Co. Inc. in Oldwick, New Jersey.

“Given the ever-improving risk evaluation techniques by ILS professionals and the capital backing this space, it was certainly inevitable that a flood cat bond would be written,” he said.

“FEMA understood coming into 2018 — and has now confirmed through the August 2018 placement — that capital markets investors have sufficient interest in NFIP risk to offer both additional reinsurance capacity and competitive pricing,” a FEMA representative said in an email.

In general, traditional primary insurance buyers are likely to access the ILS market more frequently in the future, according a report by Willis Towers Watson Securities, a unit of Willis Towers Watson P.L.C., issued last month.

“Insurance, in addition to reinsurance, is starting to become a growth area for ILS,” the report said. “The near future may also continue to see more ILS penetration in insurance,” the Willis Towers Watson report said.

And a wider variety of risks are being considered for ILS coverage, said Ms. Anger of GC Securities. “We continue to get a lot of focus on cyber,” Ms. Anger said. “The volume of inquiries and discussions on that risk for the ILS market continues to grow every year.”

Covering a broader range of perils than natural catastrophes could expand the market.

“If successful, an ILS market much larger than would be possible on nat cat alone seems likely,” said the Willis Towers Watson report.

More than half the $4.0 billion of property/casualty ILS products issued in the second quarter of 2018 focus on peak multiperil exposures, while the remaining $1.4 billion was specific to U.S. wind exposures, Willis Towers Watson said in its report.

Investors are also helping to drive market growth as they seek to increase their participation.

“End investors are largely sold on the portfolio diversification benefits of ILS and want to increase their allocations with investments linked to natural catastrophe reinsurance still their primary focus,” Willis Towers Watson said.




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