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Albeit down year-on-year, catastrophe bond issuance in the first-half of 2018 remained impressive driven by a record-breaking Q1 and solid Q2. But while activity is still robust, the continued evolution of the sector will require new regions and lines of business in order to attract more sponsors.
This is according to Tom Johansmeyer, Co-Head, PCS Strategy & Development at ISO, who recently spoke with Artemis about 2018 catastrophe bond issuance, in light of the release of the PCS H1 2018 Catastrophe Bond Report.
As the report shows, excluding cat bond lites, private deals and transactions focused on lines outside of property, catastrophe bond issuance in the first-half of 2018 totalled roughly $7.4 billion, which is down from the huge $8.8 billion recorded in H1 2017, but nevertheless impressive.
It’s worth noting that including cat bond lite, private deals and those outside of property catastrophe risks, and as shown by the Artemis Deal Directory, H1 2018 issuance totalled a massive $9.39 billion, making it already the second most active full-year ever recorded, after 2017.
According to the PCS report, $4.8 billion of the $7.4 billion of H1 2018 issuance covered North American perils, which is from 17 out of a total 24 transactions. Of this, seven transactions, or $2.1 billion of issuance utilised a PCS trigger, but despite the decline, PCS use still featured in more than 40% of North American H1 2018 activity, as measured by capital raised.
“The first half of this year may have been quieter than last year, but make no mistake – 2018 has been quite active so far. Given that cat bonds tend to provide cover for multiple years, it isn’t realistic to expect successive massive years without the occasional breather year in between,” said Johansmeyer.
He continued to explain that in order to smooth out those sorts of breathers over time, the market will need more sponsors to enter, rather than issuance being dominated by veteran sponsors that up their commitment to the space on an annual basis.
“New regions and lines of business will be crucial to that stage of cat bond market evolution, particularly in the specialty lines. Diversification does more than bring new risk to market – it fundamentally changes the growth pattern,” he added.
Despite some Latin American and Asian activity in Q1, alongside some deals that featured European risks in Q2, North America continued to dominate cat bond issuance in the first-half of 2018, which Johansmeyer says is driven by the fact the market still relies on property catastrophe risks.
“And as long as that happens, North America will continue to have a large share of the market for a while. As the ILS community becomes more comfortable with specialty lines, though, the potential for original risk to enter the market increases profoundly,” said Johansmeyer.
One area often discussed as potentially the next “Florida wind” for the ILS space, explained Johansmeyer, is cyber risk.
“The exposures are there; we just need to continue to increase market penetration. 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.
“For the ILS market to make a major difference in cyber, two factors need to be considered. The first is affirmative cyber. Increased market penetration will cause cyber books to grow. For that, a pure-play standalone cyber index is crucial. PCS Global Cyber has been live for around nine months and has doubled the number of events in the database since launching last September. And the market is already looking at ways to deploy capacity on this basis.
“Further, we’ll need to see a solution for cyber catastrophe events that includes both silent and affirmative cyber. The team has this well in progress, and you should give us a shout if you have any questions,” said Johansmeyer.