Cat bond market’s use of industry loss triggers likely to persist: Johansmeyer, PCS

As the catastrophe bond market continues to deal with the effects of the 2022 Atlantic hurricane season, Tom Johansmeyer, Head of PCS, Verisk Insurance Solutions, expects demand for industry loss triggers to persist for some time.

“Given the impacts of Hurricane Ian on the market and the fact that they will continue through 2023, use of PCS triggers in cat bonds is likely to continue. And the trend is bolstered further by the losses going back to 2017,” said Johansmeyer in a recent interview with Artemis.

“The big question is whether ILW transactions will move into the cat bond market, as we saw in 2021 with some of the global products, or whether the cost and availability of capital will result in a narrower focus for most transactions, as has been the case with the PCS-triggered cat bonds we’ve seen in the fourth quarter of 2022,” he continued.

Johansmeyer went on to highlight that, even with a clean 2023, the role of PCS-triggered cat bonds is likely to persist for the next three years, which would be elongated by any future large catastrophe events.

Considering the demand for industry-loss cat bonds will continue, Johansmeyer warned that the biggest challenge re/insurers could face is the availability of capital.

“The crowded cat bond market has impacts beyond access to capital, though,” he said. “Different structures could offer ILS managers the opportunity to choose the transactions that best fit with their objectives. Understanding how they fit into the range of options out in the market could make a difference.

“Additionally, risks and regions covered could impact how a transaction is perceived. And, of course, rate matters. My sense is that sticking to what one wants without compromise isn’t going to be a productive approach – as the cyber re/insurance market has proven time and again.”

As well as sharing his thoughts on the use of industry loss triggers in the next couple of years, Johansmeyer also commented on how reduced capacity in retro is impacting the cat bond market, as it has both benefits and challenges.

“Capacity constraints in retro could lead to greater use of cat bonds over ILWs or UNL retro, and we’re seeing some signs of that already. On the other hand, the cat bond market is being impacted by the reduction in capacity,” explained Johansmeyer.

Adding, “While the situation may not be as grim as some folks suggested to me back in September and October, it does seem that there is less cat bond capital supply than demand, and this dynamic will continue to unfold at least through the middle of next year. How the market responds to any collateral releases and the various renewal milestones through summer will be instructive.”

Read all of our interviews with ILS market and reinsurance sector professionals here.