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Surge in cat bond market set to continue in 2021

catastrophe bond

The catastrophe bond market saw robust activity last year as new sponsors and tightening retrocessional reinsurance capacity helped buoy the sector, and the trend is expected to continue.

Both the 2020 top line issuance of $11 billion of property cat bond limit placed and the fourth-quarter total of $3.7 billion were records, according to a report released last week by Aon Securities, a unit of Aon PLC.

New sponsors helped drive cat bond activity in 2020, said Des Potter, a London-based managing director at GC Securities, part of Guy Carpenter & Co. LLC.

“There are 11 new sponsors which came to the catastrophe bond market during the year, and that’s really encouraging,” he said. 

New cedents, including first-time sponsors Alphabet Inc., the parent company of Google LLC, and the Los Angeles Power and Water Department, came to the market in 2020 and helped drive growth, said Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC.

Public entities, such as the L.A. utility, often employ a parametric structure in their coverage.

“There is generally more confidence in parametric structures nowadays, and they are the types of structures those institutions usually use,” Mr. Potter said. “As sponsors get more comfortable with parametric structures, there are potential opportunities to transfer these types of risks to the catastrophe bond market.” For example, the MetroCat bond for New York City’s Metropolitan Transportation Authority issued last year was based on measured storm surge.

The parametric-based bond structure is “still something in its infancy,” Mr. Schultz said, but he expects “pretty strong growth around parametric products generally” across both traditional reinsurance and capital markets because they can be used to cover exposures that are more difficult to place and “offer an additional market for public entities to shop tough risks.”

Mr. Schultz said one draw of the insurance-linked securities market is as a source of capacity for products that may be “more constrained” in other markets, such as parametric wildfire coverage.

Mr. Schultz said one draw of the insurance-linked securities market is as a source of capacity for products that may be “more constrained” in other markets, such as parametric wildfire coverage. “We all know wildfire capacity is one of the constrained perils in the marketplace,” he said.

Power Protective Re Ltd. 2020-1 was launched in early November and settled in mid-December 2020, according to Aon. It was the first catastrophe bond issued by the Los Angeles Power and Water Department, the United States’ largest municipal utility, and secured $50 million of cover for California wildfire risk for the public entity. The three-year transaction was structured with a parametric trigger, based on reconstruction cost values within a wildfire perimeter, using data from Eqecat Inc.’s database for wildfire risk, according to the Aon report.

Power Protective Re is registered as a special purpose insurer in Bermuda, according to Bermuda Stock Exchange filings. Los Angeles Power and Water Department did not immediately respond to a request for comment.

More reinsurers are using catastrophe bonds for retrocessional coverage, Mr. Potter said, noting six new reinsurers sought such coverage in 2020. A contributing factor was the expected tightening of retrocessional capacity heading into Jan. 1, 2021, renewals, he said.

Aon’s Mr. Schulz also said more reinsurers were buying cat bonds for retro coverage. “Some of that was probably driven by the fact that at some point in the year there was a concern as to whether there would be adequate (ultimate net loss retrocession) capacity, so reinsurers issued bonds to supplement what they bought in the ultimate net loss market.”

Aon Securities expects the momentum seen in 2020 to continue into 2021. “The forward calendar and pipeline of transactions we’re aware of, all the data supports another year of elevated issuance,” Mr. Schultz said.

“We can look forward to the first two quarters with some degree of confidence given the timeline required to structure the transaction,” Mr. Potter said. “Our pipeline is relatively active, and we think we’re likely to see good issuance in the first half of the year.” 




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