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Insurance-linked securities activity continues to grow and expand, drawing new sponsors seeking protection from the alternative market and spreading to new geographies, according to industry sources.
The growth follows extensive insured losses in 2017, the bulk of which were linked to U.S. wind events, a staple of the catastrophe bond market.
Catastrophe bond markets are also growing globally, with the United Kingdom and Singapore seeking to attract business from the sector (see related story).
While catastrophe bond issuance of $4.03 billion in the second quarter of 2018 trailed last year’s record second-quarter issuance of $6.38 billion, it is still the third largest on record, according to Aon Benfield. The 2018 half-year total of $7.61 billion is just behind 2017’s record $8.55 billion.
Some $1.4 billion of 2018’s second-quarter issuance is specific to U.S. wind, according to a July 2018 update from Willis Towers Watson Securities.
Making news early in the third quarter was the FloodSmart Re $500 million Series 2018-1 Notes on behalf of the Federal Emergency Management Agency’s National Flood Insurance Program, which secured $500 million in flood reinsurance cover for three years. It is only the third reinsurance placement completed by FEMA and is the agency’s first use of a catastrophe bond.
Industry players are optimistic the novel instrument can serve as an example for further expansion.
“We hope it opens the door to broader issuance,” said Judith Klugman, global co-head of ILS at Swiss Re Ltd. in New York. “If the risk can be independently modeled, then investors can begin to assess the appropriate price. The NFIP catastrophe bond certainly shows investors’ interest in taking a broad range of insurance risks.”
The deal could prompt interest in the insurance-linked securities market from other government agencies, said Cory Anger, New York global head of ILS origination and structuring at GC Securities, a division of MMC Securities L.L.C.
“We’ve seen a long trend of the public sector accessing the market, and I think FEMA and the NFIP ceding U.S. flood risk for the first time on an indemnity basis that covers storm surge and excess precipitation — which is essentially inland flooding — as a result of named storms expands the universe of eligible perils but also could be a catalyst for other government agencies looking to the ILS market for protection,” she said.
According to data from A.M. Best Co. Inc., AIR Worldwide, a unit of Jersey City, New Jersey-based Verisk Analytics Inc., modeled all but one of the 21 catastrophe bond transactions that closed through June. The 21 transactions listed by Best were split almost evenly between those with an indemnity trigger (11) and those with a nonindemnity trigger (10).
In addition to governments, corporate sponsors are another area in which ILS players hope to see growth, observers say.
“Where the right conditions exist, cat bonds for corporates can make a lot of sense,” said Bill Dubinsky, New York-based head of ILS at Willis Towers Watson Securities. “On the cat bond side, it is a handful of large corporates and government entities.”
Such clients have more than one way to access the capital markets. Even if a sponsor is looking at a smaller limit, “they could certainly look at collateralized reinsurance or private catastrophe bonds as a way of accessing the ILS market, and we know of a number of companies that are utilizing that sort of capacity today,” Ms. Anger said.
“Typically for a 144A catastrophe bond, you are looking for $100 million in limit or more,” Ms. Anger said. Private catastrophe bonds generally range from $25 million to $75 million, and collateralized reinsurance can run up to $75 million but can be smaller than $25 million as well. “It really depends on what the protection seeker is looking to achieve and does the risk fit the ILS market,” she said.
Insurance-linked securities could also see growth in lines of coverage where limits are constrained, such as cyber, sources said.
“Growth will come from where there are capacity constraints in the market,” Ms. Klugman said. “One area where we see some potential is in the area of cyber risks. We do not have any cyber deals in the pipeline but see the potential for those risks being transferred.”
The interest in cyber exposure has been growing steadily. “It would not surprise me if over the next couple of years there is an industry solution on the cyber side,” Ms. Anger said.
Despite the substantial losses stemming from catastrophes in the U.S. during 2017, most notably from hurricanes Harvey, Irma and Maria, the market remains robust, observers say.
“We are not surprised that catastrophe bonds that have suffered losses so far are multiperil bonds and bonds with high expected losses compared to the those of the typical originations,” said Emmanuel Modu, Oldwick, New Jersey-based managing director and global head of insurance-linked securities for Best.
The growth of insurance-linked securities is getting a boost from activist jurisdictions such as Singapore and London that are seeking to draw business.