2023 underlined cat bond role in stabilising reinsurance landscape: Acrisure Re

As per analysis from broker Acrisure Re, the 2023 catastrophe bond issuance season helped to demonstrate the role that the market’s resilience played in stabilising the global reinsurance landscape.

Following a 2023 issuance season that saw more than 100 cat bonds issued at a record volume of around $16bn, analysis by executives at Acrisure Re highlights how spread guidance helped inform reinsurance pricing.

According to the firm, in January of 2023, final spreads were higher than initial indications, which was driven by the fact that the initial guidance was too low and/or investors were asking for higher spreads.

“What piqued our interest was why this initial guidance was too low and why were investors asking for a higher spread,” Acrisure Re said.

The firm continued, “What we found, was that as the market came off a rather challenging 1/1 reinsurance renewal with expectations of a strongly hardening market, the cat bond supply side, the protection buyers, were offering significantly below the asking price, causing initial spreads to be set low.

“On the demand side, however, the protection sellers, and mostly ILS investors, did not settle for the attempt and asked for higher spreads, driving an increase in spread guidance.”

However, in February and the following months, Acrisure Re noted that the high spreads started to be “perceived as out of sync”, being too close to the price for capital.

“Spreads needed to decrease, and voila, a correction to acceptable levels set in and spread guidance was decreased,” the firm explained.

The cat bonds issued in Q4 then ostensibly reflected the hardening reinsurance market as investors asked for higher spreads compared to the initial offers.

Acrisure stated that while it is difficult to provide “robust causation” between cat bond spread guidance and reinsurance pricing, “the two are, ultimately, two forms of reinsurance subject to the same market shifts as each other”.

Sandro Kriesch, Co-Managing Director Acrisure Re Cat Bond Solutions, commented, “The data reflects a pleasing and very intuitive result.

“After all, cat bonds are another form of reinsurance and retrocession, which, per se is connected to the reinsurance market. No surprises.”

Craig Darling, EVP & Head of Critical Cat, Acrisure Re, added, “Over 2023 we have observed a very active reinsurance market for sellers of reinsurance across traditional and ILS investors.

“Insurance companies and MGAs are actively considering all reinsurance and risk transfer options for their reinsurance structures.

“Clients are looking to secure efficiencies across their program structure, with a heightened interest in collateralized reinsurance and especially Cat Bonds.”