Cory Anger, Global Head of ILS Structuring, GC Securities
The influx of new capital into the (re)insurance industry constitutes the largest change to the sector’s capital structure in recent memory. Over the past 24 months, approximately USD20 billion of new capital has entered the market through investments in insurance-linked securities (ILS), funds and sidecars as well as the formation of hedge fund-related reinsurance companies and collateralized reinsurance vehicles.
The amount of limit placed utilizing ILS and collateralized products continues to grow and some markets are broadening the line of business and product focus.
Utilization of capital markets capacity in the first six months of 2014 saw a continuation of the growth trends seen in 2013. Revealing a widening of application, capital markets investors continue to be drawn to the (re)insurance space primarily due to the advantages it offers as a non-correlating asset class. Also, the recent availability of meaningful risk opportunities continues to drive investors to focus on the insurance-linked security space.
Capacity outstanding and size of the overall global property catastrophe limit continued to expand for all forms of capital markets capacity (144A catastrophe bonds, private catastrophe bonds, collateralized reinsurance and sidecars). However, as capital continues to inflow from an ever broadening investor base, including pension funds, endowments, sovereign wealth funds and asset managers, the most notable development in 2014 is the expansion and diversification of how this capital is sourcing the (re)insurance risk. The highest six month issuance of 144A catastrophe bonds occurred in the first half of 2014, setting a record of USD5.7 billion, while the risk capital outstanding grew to an unprecedented approximately USD20 billion.
The growth in the utilization of private catastrophe bonds continues at similar rates. In an environment of growing demand for capital markets capacity, GC Securities* formulized its private catastrophe bond approach in June 2013 with development of the Tensai private catastrophe bond program in conjunction with Tokio Millenium Solutions’ Shima Re Ltd. facility.
New cedents continued to enter the catastrophe bond space in 2014. Seven new sponsors utilized the 144A catastrophe bond market for the first time in the first half of 2014. Additionally, several new sponsors entered the private catastrophe bond market.
Cedents are increasingly attracted to capital markets capacity because of its competitive pricing and broadening indemnity coverage (with increasing inclusion of non-modeled perils). We have seen a growing request for incorporating certain terms and conditions, for example, hours clauses and definitions of named storms, from capital markets structures into traditional reinsurance placements.
The use of capital markets-based risk transfer capacity by public entities, insurers of last resort, and compulsory catastrophe pools and disaster facilities continues to expand. These deals included Turkey’s Turkish Catastrophe Insurance Pool, Mexico’s FONDEN and New Zealand’s EQC. Most large U.S. insurers of last resort, such as CEA, Citizens (FL), Citizens (LA), North Carolina Joint Underwriting Association and the North Carolina Insurance Underwriting Association (NCJUA/NCIUA), and Texas Windstorm Insurance Association, are utilizing capital markets capacity including collateralized reinsurance and catastrophe bonds.
Capital markets-based capacity provides cost savings to these entities allowing them to utilize such savings to build surplus or buy needed additional coverage; it improves coverage terms (transforming programs from per occurrence to annual aggregate responses) and it provides leverage to keep traditional capacity sources honest and to facilitate their willingness to adjust coverage terms that may not have been feasible without the use of capital markets based risk transfer capacity.
Also, as public entities strive to reduce public debt, there is a clear benefit derived from limiting the risk that natural perils can pose to a state’s balance sheet. At the time of loss, governments may be spared these enormous costs and they may have enhanced flexibility to finance economic and social development or reduce taxation.
Capital markets capacity continues to innovate as highlighted by the recent issuance of a catastrophe bond by the Metropolitan Transportation Authority (MTA). This issue, MetroCat Re Ltd. (MetroCat), which came to market in July 2013, demonstrated the willingness of capital markets investors to assume storm surge and flood risk from named storms in a cost effective manner. Additionally, GC Securities’ recent private catastrophe placement from the World Bank’s new catastrophe note facility for the CCRIF shows the application for those sovereigns that need to protect against natural risks but whose limit needs may be more modest.
Up to this point insurers and reinsurers have relied upon capital markets based capacity primarily for property catastrophe risks (either for existing business or for growth into new areas). Moving forward, there is a question of the degree of expansion into longer tail, less volatile insurer lines given the growing prevalence of hedge-fund backed reinsurers seeking to reinsure asset intensive long-tail liabilities. With the dialogue just beginning at the C-suite level, further innovations are a matter of when…not if.
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*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.
Cory Anger, Global Head of ILS Structuring, GC Securities