Following a record-breaking year for insurance-linked securities (ILS) issuance in 2014, 2015 is set to reach new heights as investor interest in insurance catastrophe risk continues to grow, according to the latest ILS report from Willis Capital Markets & Advisory (WCMA).
Non-life catastrophe bond issuance in Q4 of 2014 totalled $2.1 billion, capping the record year which saw over $8 billion of non-life catastrophe bonds issued. The previous record-breaking high was $7.2 billion in 2007.
Tony Ursano, CEO of WCMA, said: “As investors become more sophisticated, any coverage gaps between reinsurance provided by traditional rated reinsurers and that provided by investors is shrinking—72 percent of catastrophe bonds used indemnity triggers in 2014, only 30 percent used such triggers in 2007.”
“It took over seven years to break 2007’s ILS issuance record. In the current climate there are no signs of growth abating and we could very easily see two consecutive record-breaking years. We would not be surprised to see $9 billion of issuance in 2015.”
Against the backdrop of a reinsurance market reshaping, the WCMA report notes that although issuance is set to rise, market dynamics in 2015 are less predictable.
Regarding this outlook, William Dubinsky, managing director and head of ILS for WCMA, commented: “For some, predictable may be good but uncertainty creates opportunity for those who are prepared to act.”
While 2014 saw the extension of many terms and conditions from the collateralised reinsurance market to the catastrophe bond market, 2015 may see “further extensions, including for indemnity-trigger retrocession deals,” according to Dubinsky.
Also, despite falling spreads and growing assets under management, the report also outlines that the rates of both decline and growth are likely to flatten.
“As a reaction, some investors will reach for yield and accept more risk while others may lean towards more transparent risk transfer with modest expected returns,” Dubinsky added.
A final trend for 2015 predicted in WCMA’s report is large reinsurance buyers challenging the structure of the industry itself after reaching a plateau in their ILS strategies under current conditions.
