The latest pricing data indicates that returns have slipped further for both the cat bond and reinsurance markets
The third quarter has not been an active one for new reinsurance deals or cat bond issuance – both markets tend to pause during US hurricane season. But it is clear that excess capital is continuing to affect returns. As the value of hedging catastrophe risk improves, new sponsors are likely to be drawn into the market.
According to the latest pricing guidance from Guy Carpenter, Industry Loss Warranty (ILW) prices have slipped between 5%-10% in the third quarter. Prices were last at this level in 2006 before losses caused by hurricane Katrina had fully impacted the market.
ILW prices are a relatively clean pricing metric as terms and conditions are stable over time – though inflation and demographic changes have increased the likelihood of any particular loss amount.
This chart shows the rate on line for a US wind $20 billion ILW. Click here to see the interactive version of the chart which includes data from other perils and other loss levels (you must login or register for free).
RMS monitors pricing in the cat bond secondary market and their measure of risk adjusted cat bond yields shows a similar story. As anticipated, the jump in returns that followed the huge volume of new issuance this spring has almost disappeared.
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