Evident innovation
While catastrophe bond growth may appear flat year-on-year in 2015, the reign of collateralised reinsurance will continue, as sidecar activity booms and new and evolutionary ways to utilise the capital market appetite continue to flow.
Speaking of the activity in Q1, and the current trends in the market, Paul Schultz, CEO of Aon Benfield Securities, says that 2015 is performing as expected.
“Through the first six weeks of 2015, we’re on par with last year’s issuance levels, and this is consistent with our view that ILS issuance growth in 2015 is going to be flat on a year-over-year basis,” he says.
“However, relative to January issuance, we are likely to see many more deals in February, and March is expected to be even stronger still.
“I also think we will see a greater number of the larger deals, so between $300 and $500 million will be coming to market. We should also continue to see the multi-currency transactions, but not necessarily covering new currencies.”
Speaking of Kane SAC’s new note programme, which should facilitate secondary trading for cat bonds via the introduction of the EuroClear Settlement System, Schultz was unable to comment on the platform itself or whether we would be likely to see more of these types of programmes, but he said that anything that encourages trading would be a step in the right direction.
“Clients aren’t transferring risk for the sake of it, but they might change the form in which they transfer that risk.”
“There’s plenty of liquidity today, but anything that can encourage trading is obviously helpful, even if we are not currently restrained,” he says.
As sidecar issuance rises, Schultz says that catastrophe bond aggregate is likely to be affected. However, he says, no client is transferring risk for the sake of it, so the bigger picture is that of the form they elect for.
“Clients aren’t transferring risk for the sake of it, but they might change the form in which they transfer that risk. So that could be in a quota share via sidecars, it could be in the larger hedge fund type of deals, or in cat bonds,” he explains.
“With a view that we’re going to have up to $150 billion of alternative capital in the market in the next few years, we think we’ll see a lot more of all various forms of risk transfer.”
As the industry seeks to innovate, structures such as the ACE/Blackrock deal, in which the insurer forms an internal reinsurance vehicle capitalised by alternative capital to manage a portion of its ceded premium, are expected to increase.
“We’re going to see more bespoke transactions and open market deals too,” he says. “The execution risk around the bespoke deals is somewhat lower because you know from where the premium will be sourced, which is attractive to cedants.
“The issuers then just need to identify which underwriters have already taken transactions like this, and which ones are still available. Right now, a lot of these transactions are focused around reinsurance, but at some point this market will move to insurance as well, creating more of these types of deals in the future.”
While these internal vehicles could bring less need for brokers, Schultz says that as long as all parts of the distribution chain are adding value, there’s always going to be a role for these products.
“When there’s no value or perceived value, that’s when there’s going to be some disintermediation of that distribution channel,” he says.
“Currently there’s still value for all of these roles within the traditional chain. The whole market is changing, and those that change with it are the ones that have a sustainable business model.”
