July 6, 2016

Does Size Matter? PCS® Q2 2016 Catastrophe Bond Report

OVERVIEW

In some ways, 2016 has felt like a parallel catastrophe bond universe. Since we first issued the PCS® Catastrophe Bond Report four years ago, most have involved a story around everything getting bigger. And along the way, we’ve been careful to remind readers that bigger doesn’t always mean better. The catastrophe bond market—with about 20 years of history—is still really in its infancy. For a while, continual annual growth was a helpful indicator of the market’s ability to grow. Today, though, that’s really a settled issue. While there are still corners of the market where there’s a bit of a learning curve, the potential benefits of catastrophe bonds have been well communicated across the industry. And the barometer of market health has shifted to the completion of new and innovative structures, rather than just producing more of the same. Of course, such developments show how the insurance and reinsurance industry continues to improve how it manages risk and capital through the use of insurance-linked securities (ILS). Last year, of course, we saw an abundance of innovation. The cat bond lite market demonstrated explosive growth, with nearly $400 million in fresh capital coming into the market. Panda Re, the first catastrophe bond covering China, was welcomed by the ILS community. And risk from Turkey came back into the market. But 2016? Well, it’s looked a lot different. Cat bond lite issuance is off nearly 25 percent, with none of it coming in the first quarter—a marked change from the year before. Only two catastrophe bond transactions came from first-time sponsors, although Espada Re represented a new approach for a frequent participant in the catastrophe bond market. The concentration of old pros demonstrates that the case has clearly been made for including catastrophe bonds in a strategic approach to capital management. But that’s still a far cry from broad adoption, suggesting plenty of room for future growth.

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Source: PCS

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