Cat bonds at the 1.1: from would-be market complement to competitor
Cat bonds came off their year of record issuance to headline reports from the 1.1 reinsurance renewals, advancing from ‘complement’ to ‘competitor’ for traditional players at the upper levels of property cat towers, key reinsurance brokers have suggested.
“Appetite for peak perils and upper layers was generally strong, with a vibrant catastrophe bond market providing further competitive tension in certain markets,” Aon said outright in its review of the 1.1 2024 renewals.
Global brokerage Howden called it similarly: “The rebound in the ILS market was an important factor as competition increased for higher-attaching layers,” Howden said in 1.1 analysis.
And by ILS, Howden made clear they meant cat bonds, “the preferred ILS product” given their height in the towers, versus lower-placed collateralized reinsurance tied more frequently to traditional carriers.
For the broader 1.1 renewals, the overriding message from the full swathe of major brokerages is that capacity proved plentiful to cover demand, leading to a smooth renewal.
But that story is not homogenous: the higher you looked in the property cat towers, i.e. the more you looked at layers that had benefitted from the cat bond flood, the stronger the bidding at 1.1 and the greater the downward pricing pressure.
“With ample capacity, the upper layers of property catastrophe programs experienced downwards pressure on pricing at the January 1 renewal,” Aon said.
Capacity proved “more than adequate to meet demand, resulting in a competitive environment for peak perils and upper layers,” Aon brokers wrote.
Gallagher Re, for its aprt, went on to cite “many cases” of over-placement in Europe in higher layers. Upper layers in the US “benefited from ample capacity” versus lower levels suffering upward pressure on rate.
Guy Carpenter likewise spoke to risk-adjusted rate declines near the upper portions of placements, in sharp contrast to lower ends where “pricing pressure was greatest.”
Talk of cat bonds as a source of competitive pressure proved to be quite a switch from the narrative that had dominated in the lead-up to the 1.1 renewals, be it at Monte Carlo, Baden-Baden or into the final stretch.
The version spelled out by traditional reinsurers along the way hadn’t spoken so directly to record cat bond issuance or the prospect of “competition” from third party capital.
Cat bond issuance had been tossed together in a single pile with their own languishing collateralized reinsurance offers in order to speak of “stagnation” in third party capital flows to the broader category of ILS.
Their conclusion: capital market investors were put off and would stay away until they, the traditional reinsurance market backbone, had proven the reinsurance market’s recovery with several years of strong returns comfortably in their own pockets.
The cat bond story could only be ignored so long. Sixty-nine different bonds were brought to the 144A market in 2023, totalling more than $15.2 billion in limit, according to the Guy Carpenter count. Outstanding notional P&C cat bonds pushed towards $41 billion & ILS beat the $100 billion mark.
While $41 billion isn’t much against some of the calculations of traditional reinsurer capital that get tossed about, those comparisons are rarely apples against apples. Cut the traditional reinsurer capital figure down to the portion allocated to property cat, then hack it down again from whatever solvency capital or even accounting equity measure is used to the fully deployed figures implicit in cat bond sums and … those cat bond apples are a viable portion of the apple pie.
Swiss Re stepped out in the most notable tip of the hat from a traditional reinsurer to their cat bond rivals, but their view to modest market impact held steady.
“Strong cat bond issuance is complementing and stabilising the traditional (re)insurance markets,” Swiss Re analysts said as recently as December.
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