Cat bonds to attract disproportionate share of inflows in 2023: Dubinsky, Gallagher Securities

The insurance-linked securities (ILS) and reinsurance market environment in 2023 will continue to favour the catastrophe bond product, with this industry segment expected to see a “disproportionate share of inflows”, Bill Dubinsky, CEO of Gallagher Securities told Artemis.

During an interview, Dubinsky highlighted the fact investors are still a little wary of the collateralized reinsurance product, after a number of challenging years of catastrophe losses.

While the outlook is improving, the backdrop remains a challenge for ILS managers when it comes to fundraising, but for cat bonds this should be easier, Dubinsky believes.

“ILS funds themselves are sanguine about what happened in 2022. These funds by design provide capacity to help the industry address peak catastrophic events such as Hurricane Ian,” Dubinsky said.

“On top of that, the changes passed in the special Florida legislative session in December may have removed the most egregious of the difficult-to-model loss scenarios although investors still remain circumspect,” he continued.

Discussing what it will take to rebuild investor confidence in the ILS asset class overall and whether this will be enough, Dubinsky told Artemis, “They want to see some real-world evidence the changes work before fully incorporating them into investment decisions.”

There are deeper challenges to overcome, related to performance, Dubinsky expects.

He explained, “On the other hand, some of the end investors, even if they might acknowledge that 2022 losses make sense, still struggle with manager performance, especially for some types of collateralized re strategies that underperformed in the 2017 to 2021 period.

“The end investors wanted to see good performance in 2022 before committing additional non-life capital and that good performance seemingly vanished right before the finish line. As a result, the end of 2022 saw churn rather than large inflows notwithstanding rising risk spreads.”

The upshot of which is that catastrophe bond investments are likely to be looked on more favourably this year, with collateralized reinsurance managers finding raising new funds more challenging, Dubinsky believes.

“The 2023 environment thus still favors the cat bond product that outperformed the last five years vis-à-vis collateralized re. Cat bonds should continue to attract a disproportionate share of inflows.”

But he cautioned that, “Lest cat bond supporters get too complacent this cycle will eventually turn back towards collateralized re without increased efficiencies and ease of use for cat bonds.

“Markets are self-correcting in that way.”

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