Investors inching back to cat bond market despite climate losses: AM Best
Investors are inching back to the catastrophe bond market as issuance volume reached about $2 billion in April despite rising cat losses, AM Best said in a recent webinar.
Cat bonds could be on course for a record quarter, having recorded $2.05 billion in April 2023 compared to $490 million in 2022 and $1.33 billion in 2021, according to data from the Artemis Deal Directory.
Cat bond issuance volumes rose by more than 18% year-on-year in April 2023, from $1.73 billion in 2017.
Despite cat bond issuance volumes rising, AM Best warns that, “more investors are increasingly avoiding risks that may be caused by climate change,” the rating agency said in its webinar titled “ILS Market Trends: Where is 2023 Headed?”.
AM Best highlighted that due to significant catastrophe losses in recent years, investors are seeking to explore alternative insurance risks that can offer a more stable outcome. This may involve shifting focus from high-severity, low-frequency risks, such as catastrophes, to more low-severity, high-frequency risks.
The rating agency identified three main reasons contributing to a hard market in the reinsurance and insurance-linked securities (ILS) industry. These include inflation, heightened cat loss, and asset repricing.
Average cat loss from 2017 to 2022 was $112.7 billion, AM Best noted.
AM Best reported that the first quarter of 2023 recorded a cat loss of over $22 billion, surpassing the long-run average of $15 billion for the same period.
About 70% of the losses were attributed to secondary perils, and there are still months left and the impending hurricane season for potential cat losses worldwide, the rating agency explains.
“Of course, there’s uncertainty about the ultimate cost of these nat cat events, but the top three in terms of insured losses will probably be severe convective storms in southeast and Midwest Turkey and Syria earthquake, and Australia floods.”
Major hurricane season is in the second half of the year, the rating agency noted.
Collateralized reinsurance is the largest segment of the ILS market and probably the closest thing to traditional reinsurance. Its capacity is estimated between $45 billion and $49 billion.
“Contrary to popular belief, cat bonds can trap capital as well, just like collateralized insurers.”
Sidecars and industry loss warranties make up about $11 billion to $13 billion of the capacity, AM Best said.
AM Best expects disruption in retrocession market and expects total retro of $15 billion to $20 billion. It noted that retro shortage over the years has prompted investors to search for alternative sources of retro coverage like cat bonds.
