Catastrophe bonds played a greater role in stopping the insurance sector in recent reinsurance renewals as other sources of capacity declined and returns increased for cat bond investors.
The increased demand for bonds, which was one of the first insurance linked. securities when they debuted about 25 years ago, was one of the driving forces behind the cat bond market for 2020 reaching its record $ 11.3 billion in new share issue, market sources say.
"Disaster bonds helped fill some of the retrocession capacity," said Philipp Kusche, New York-based global head of ILS and Capital Solutions of TigerRisk Partners Inc. Limited retrocession capacity was "one of the trends seen in the fourth quarter 2020, "he said.
Retrocessional reinsurance provides reinsurance protection. Historically, coverage has been provided by traditional retro-style reinsurers and special writers, but over the past decade, ILS structures, including safety reinsurance, sidecars, industry loss guarantees and cat insurance, have cat insurance. greater role in the retro market.
"We have seen a number of reinsurers, including Swiss Re, continue to be users of the emergency bond market," said Kusche.
Swiss Re Ltd. used disaster bonds in 2020 and issued banknotes through Matterhorn Re, after returning to the ILS market in 201
Other reinsurers that issued disaster bonds in 2020 included Hamilton Re, a unit of Hamilton Insurance Group Ltd., and Convex Group Ltd., the special insurer and reinsurer founded by former Lloyd & # 39 ;s London insurer Stephen Catlin. named storms, including the District of Columbia, Puerto Rico and the US Virgin Islands, and U.S. and Canadian earthquake risks, on an annual basis, using a weighted PCS industry loss index trigger, through June 7, 2023, according to listing information on the Bermuda Stock Exchange website. Many ILS transactions are listed on BSX.
Hamilton Re & # 39; s Easton Re Pte. Ltd. provides $ 150 million in coverage for US named storms and earthquakes through January 8, 2024, according to BSX.
Cat bonds helped fill a retreat in retrocessional capacity due to existing market players leaving the market, said Brad Adderley, a Hamilton, Bermuda-based corporate partner at law firm Appleby. Improved pricing and investor demand also helped boost cat bond performance, he said.
Improved pricing for emergency bonds is due in part to increased demand as vehicles are used to replace reduced capacity, Adderley said.
Increased supply from both emergency bond investors and the market for the ultimate net loss coverage led to a 7% growth over the previous year in disproportionate retrocession capacity, says Des Potter, CEO of GC Securities in London, part of Guy Carpenter & Co. LLC.
The retrocession market showed a shifting demand for capacity as the issuance of index-linked bonds grew to about 28% of the disproportionate retrocession capacity, he said. At the same time, traditional retrocession disaster investments decreased by 9% and stand-alone disasters in direct and optional investments increased by 32%.
The cat bond market is expected to maintain its momentum.
The 2021 issue is already at "a fairly high level and we expect it to continue throughout the year," says Mr. Kusche at TigerRisk. "We expect continued use of the emergency bond market throughout 2021." by the ILS asset class, said Potter.