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Alternative capital market still reliant on property catastrophe risk: Johansmeyer, PCS

12th July 2018 - Author: Luke Gallin

The issuance of catastrophe bond and insurance-linked securities (ILS) transactions during the first-half of 2018 remained strong, and there’s an opportunity for the alternative reinsurance capital market to enter new regions and lines of business, ultimately transitioning away from its reliance on property catastrophe risks.

Tom Johansmeyer, PCSCatastrophe loss data aggregator, PCS, highlights an active first-half of the year for catastrophe bond issuance in 2018 in its recent sector report, which, reveals that although less pronounced than some pervious years, issuance was again dominated by transactions covering North America.

Citing data from the Artemis Deal Directory, but excluding cat bond lite, private deals, and transactions covering lines outside of property, PCS reports H1 2018 catastrophe bond issuance of $7.4 billion from 24 transactions, of which $4.8 billion, or 17 transactions covered North American perils.

It’s worth noting that Artemis’ data, which includes cat bond lites, private deals and transactions focused outside of property, puts H1 2018 cat bond and ILS issuance at $9.39 billion.

“Due to Q1 issuance activity, international diversification remains a greater factor in 2018 than it was historically. However, we’re still looking at a market that relies on property-catastrophe risk. And as long as that happens, North America will continue to have a large share of the market for a while,” explained Tom Johansmeyer, Co-Head, PCS Strategy & Development at ISO, speaking to Reinsurance News.

For a number of reasons, including ease of entry, more advanced modelling and subsequently better loss estimation and pricing metrics, the ILS, alternative, or third-party reinsurance market has always been heavily focused on property catastrophe risks, particularly in the U.S.

While catastrophe bond transactions do also cover exposures in parts of Asia, Europe, and also perils in Latin America, the influence of alternative capital outside of property catastrophe risks has remained limited, and, it’s this expansion that is believed to be key to the market’s continued evolution.

“As the ILS community becomes more comfortable with specialty lines, though, the potential for original risk to enter the market increases profoundly. In particular, cyber is often discussed these days as potentially the next “Florida wind” for the ILS market. The exposures are there; we just need to continue to increase market penetration,” said Johansmeyer.

Cyber risk is widely viewed as one of the insurance, reinsurance, and ILS markets’ biggest opportunities and challenges, and while market penetration is increasing, inherent complexities surrounding modelling – exacerbated by the increased interconnectedness and digitalisation of the world –  has hindered market development.

“The use of industry loss index tools, even for industry-wide loss benchmarking, is an important start to this process. The PCS global specialty lines suite of index tools was launched specifically to help insurers, reinsurers, and ILS funds gain more access to original risk,” explained Johansmeyer.

But it isn’t just cyber where the alternative reinsurance market could potentially increase its influence. With more and more sponsors and investors becoming attracted to the space, aided by its impressive response to 2017 catastrophe events, there’s a growing need for continued market evolution, and Johansmeyer feels that “new regions and lines of business” will play a crucial role, particularly in the specialty arena.

“Diversification does more than bring new risk to market – it fundamentally changes the growth pattern,” said Johansmeyer.

The presence of alternative capital in the property catastrophe arena, where it continues to grow its share despite the impacts of 2017 losses, has contributed heavily to muted price increases during recent renewals.

With this in mind, the market’s expansion into other areas of the insurance and reinsurance industry could help to reduce competition in some of the most pressured lines of business, while bringing diversification and yield for capital markets investors.

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