The CAT bond sector has surpassed $100bn in cumulative issuance since its inception more than 20 years ago, according to Aon Securities.
The sector, which began with the placement of a $45m all-peril CAT bond in 1996, has since seen a gradual increase in the use of insurance-linked securities (ILS) solutions by the (re)insurance industry, with frequent new records being set in terms of annual issuance volumes, the firm said in a statement.
In 2009, alternative capital stood at $22bn, and during the past decade its average rate of growth has far exceeded that of traditional reinsurance capital. Since 2016, alternative capital has remained at or near record highs, with around $93bn currently in the (re)insurance marketplace of an estimated $610bn total reinsurance capital. The volume of alternative capital is even more significant when compared to reinsurance capital, since the former is predominantly focused on property CAT risk.
CAT bond issuance generally follows the activity of the Atlantic hurricane season – 2017 and 2018 hurricane events meant there was a surge of issuance during those two years. Though not as dramatic as the 300% increase after the hurricane season of 2005 – which included Katrina – these past two years have had active enough hurricane seasons to pique greater interest by investors. By 4Q2019, the global CAT bond market stood at $36.6bn, with $4.4bn in CAT bonds issued throughout the year.
Further, in November last year, the World Bank and the Philippines issued two CAT bonds listed on the Singapore exchange. This represented several firsts and a promising future for ILS and disaster resilience in Southeast Asia – the first World Bank bond listed on the Singapore exchange, the first World Bank bond to be listed on an Asian exchange, and the first CAT bond to be sponsored by a sovereign Asian nation.
The growing ILS scene
Over the years, there has been an evolution in investor type – originally comprising primarily reinsurers and life companies, then hedge funds, and now inclusive of dedicated ILS managers and institutions, investing on behalf of a significant number of global pension funds involved as the upstream capital providers.
Accordingly, as markets became more sophisticated with greater resources, ILS transitioned from being commonly perceived as an exotic alternative investment offering a large premium to a mainstay of many portfolios, supporting the expansion from simple parametric or industry loss structures to coverages more closely resembling those found in the traditional market, said Aon.
Aon Securities CEO Paul Schultz said, “From its beginnings in 1996, the ILS sector has shown remarkable growth, reaching a point today where it is an integral component of the way in which (re)insurers approach risk transfer. Having endured significant tests in recent times, the sector has shown strength in adversity, proving that (re)insurers and investors view ILS as being an enduring and important part of the industry. Reaching this $100bn milestone is a fantastic achievement, and we anticipate many further successes for ILS in the years to come as it expands into a greater number of geographies and perils.” M