Despite anticipating that catastrophe bond issuance volume may be muted in the short term due to the quick rise in interest rates, DBRS Morningstar expects that activity will pick up in the second half of 2023 and beyond as the rate environment stabilises and demand for catastrophe protection grows.
The rating agency notes that while P&C insurers have generally performed well in recent years, catastrophe experience overall has been challenging for the industry.
2022 marked the second consecutive year where global catastrophe insured losses exceeded $100 billion.
The rating agency suggests that most reinsurers have responded by substantially increasing rates for cat coverage, with some going even further and reducing exposure to problematic lines.
Despite this hard market, reinsurers remain cautious going into 2023 as high inflation in claims cost and the expectation of increased frequency of severe weather events make cat coverage expensive to provide.
DBRS Morningstar states that cat bonds and other alternative risk transfer instruments may have a greater role to play going forward, as reinsurers restrict coverage and additional sources of risk-absorbing capital are needed.
Further, the reinsurers themselves may also choose to offload more of their own cat risk exposure to the cat bond market as part of their risk-management strategy.
DBRS Morningstar writes that it expects a “Moderate decrease in issuance during the first half of 2023 as higher interest rates will limit the amount of supply in the market.”
Adding, “As investors request higher returns, it is likely that cedents will wait for better market conditions before choosing to issue in volume.
“However, if high demand persists and pricing tightens into the second half of 2023, we expect a slight pickup as cedents approach the market in need of coverage.”
As for 2023 cat bond issuance thus far, (follow the link to see the full Catastrophe Bond & ILS Deal Directory of our sister publication, Artemis) the rating agency suggests that it has reached approximately $831 million, a net decrease of 19% compared with the previous year.
