Artemis Live - Insurance-linked securities (ILS), catastrophe bonds (cat bonds), reinsurance

The catastrophe bond market is on-track to break multiple records after a particularly busy second-quarter of 2021. Activity in the catastrophe bond and related insurance-linked securities (ILS) market accelerated again in the second-quarter of 2021, with the three-months seeing an incredible $8.5 billion of new risk capital come to market, according to the latest report and data from Artemis. Q2 2021 has set a new quarterly record for issuance, at $8.5 billion. This staggering level of new reinsurance and retrocession risk capital was supplied through 30 transactions consisting of 66 tranches of notes. Of the record breaking Q2 issuance total, a significant almost $6 billion, or more than 70%, covered property catastrophe risks. Our data shows that this is behind only Q2 2017, a period in which a huge $6.4 billion of quarterly issuance covered catastrophe risks. However, as at the end of H1 2021, cat risk issuance has reached a new high of more than $8.5 billion for the first six months of this year, which is slightly higher than the record for property cat bonds issued in the first-half previously set in H1 2017. Year-on-year, cat bond and ILS issuance increased by approximately $4.87 billion, ensuring that for the first time ever, H1 issuance has surpassed the $10 billion mark. In fact, combined with robust investor demand for reinsurance-linked returns and sponsor appetite for protection in Q1, the $8.5 billion of issuance witnessed in Q2 now takes H1 2021 total issuance of catastrophe bonds and related insurance-linked securities (ILS) to a massive $13.12 billion. To put this into context, more than $13 billion of issuance at the halfway stage of the year means that 2021 is already the third most active full-year on record, behind only the $16.4 billion and $13.9 billion recorded in 2020 and 2018, respectively. As demand for collateralized reinsurance persists and the cat bond market offers particularly attractive pricing conditions, we expect issuance to remain solid through the full-year.

For our latest Artemis Live interview we wanted to dive into a hot topic, inflationary pressures, material prices and labour costs and how this could play into catastrophe claims for the insurance, reinsurance and insurance-linked securities (ILS) industry in 2021.  Inflation is big news currently, with some economists expecting a sustained period of price increases and inflationary pressures around the world.  There are several factors causing this, some specific to different locations and regions of the world.  But for the insurance, reinsurance and insurance-linked securities (ILS) market, materials, labour and other costs have in some cases risen significantly, which has ramifications for catastrophe events and possible loss amplification to claims.  To help me dive deeper into this issue, I spoke with two senior Verisk Analytics executives with years of experience on the claims-side of the market, Mike Fulton, President of Xactware and Tom Johansmeyer, Head of PCS.  Fulton explained the current situation, "We're in new territory. This has not happened in the past, even in my thirty years in the business. "We're seeing inflation in several areas, some of that is significant and we certainly expect additional inflationary growth in both material and labour for the near-term."  Johansmeyer explained that this is a particularly hot-topic for the industry at this time, "It's interesting, because we've been getting calls about this for almost a year now."  He advised market participants ensure they have the access to data that's required to help in understanding how inflationary pressures could play into catastrophe claims.  "It's important to look at PCS alongside Xactware, because we'll (PCS) tell you what the cat is doing, we'll help you understand what your portfolio is doing. But as you dig into that, it's the granularity that you see with Xactware, which is literally as close to the risk as you can get, that provides those sorts of insights."  This interview features a discussion of what these inflationary pressures mean and how reinsurance and ILS market participants may deal with the effects of it, including hedging, retrocession and other portfolio management opportunities.

For our latest Artemis Live interview we were joined by two Jeff Waters and Ben Brookes from catastrophe risk modeller RMS, to discuss the latest update to the RMS North Atlantic hurricane model and how the insurance-linked securities (ILS) market should think about this evolution in modelling hurricane risk.  RMS has recently launched an updated version of its North Atlantic hurricane risk model, with Version 21 containing some changes that are important for reinsurance and insurance-linked securities (ILS) market participants to understand, not least for the investor side of ILS and catastrophe bonds.  Jeff Waters, Meteorologist and Senior Product Manager at RMS and Ben Brookes, VP, Consulting Services at RMS joined us for the discussion.  With the 2021 Atlantic hurricane season now upon us, their explanation of the updates to the hurricane model and how ILS fund managers and investors should think about this, is valuable preparation for the storm season ahead.  Waters explained why the updates are important, “With Version 21 of our Atlantic hurricane models, we really continued to evolve the science of hurricane risk modeling.  “Over the years we’ve introduced various enhancement, such as multiple views of event frequencies, a very comprehensive storm surge modelling framework. All those key components remain, we’ve just enhanced them with the latest scientific understanding of the hurricane risk landscape. “A lot of that in Version 21 is informed by new data and learnings from recent impactful seasons, including $6 billion in new claims data.”  Brookes discussed at a high-level how capital market investors and those in the ILS market, such as fund managers and collateralized reinsurance players, should think about the updated model.  “In Version 21, our reference view of risk generally yields fairly small changes for ILS, versus the prior version. We’ve made some tweaks to the sets of hurricane rates that we have based on the data from the last couple of seasons, and those changes are relatively small overall,” Brookes said. Continuing to explain, “We’re also updating our industry exposure database as part of Version 21. The changes for that again are relatively small to bring the exposure in line with the latest growth trends. So the changes in the baseline views, if you like, are relatively muted.  “I think what’s more interesting is the impact and how we’re able to inform understanding of key uncertainties. I expect fund managers might want to think about how they’re pricing risk if the roof replacement rules are strictly followed, because those can have a fairly meaningful impact on loss.”

During a recent Artemis Live webcast, industry experts argued that utilizing technology will be critical in enabling the reinsurance and alternative capital markets, or ILS sector, to help hedge pandemic risk using parametric solutions. The event was sponsored by Vesttoo, a specialist in risk modeling and alternative risk transfer for the Life and P&C insurance markets, and which was represented by CEO Yaniv Bertele. Also present on the panel were James Potter, CEO of Rokstone Underwriting, Luca Tres, Head of Strategic Risk & Capital Life Solutions, EMEA at Guy Carpenter, and David Bearman, CEO of Aventum Group. As a backdrop to this discussion, recent renewals have seen insurance and reinsurance players scramble to exclude pandemic risks from their books, due to the size and systemic nature of the peril, plus the unintended nature of the cover they have in many cases found themselves on the hook for. But Bertele argued that more sophisticated utilization of technology could help the capital markets to get a handle on pandemic risk, and “bridge the gap” between the now-familiar territory of catastrophe risk and some of the more complex long-tail risks. The panel discusses the way parametric triggers could be used to construct pandemic hedges for P&C insurance and reinsurance risk, as well as the potential challenges in transacting in this while a global pandemic is ongoing.

For our latest Artemis Live interview we were joined by Tom Johansmeyer, Head of PCS, to discuss the insurance-linked securities (ILS) market's appetite to invest in strike, riot & civil commotion (SRCC) or political violence related risks.  The discussion came about because of a recent piece of work undertaken by Tom and his team, in which they polled the insurance-linked securities (ILS) market for its view on political violence as a class of business, including strike, riot and civil commotion (or SRCC) risks.  Tom and his team at PCS surveyed some 60% of the ILS fund market, by assets under management, equating to around 15 firms, to find out what ILS managers themselves think about SRCC or political violence risks and what it might take to make it a class of business they want to underwrite, as well as what if anything might stop them from doing so.  While ILS fund mandates can be very prescriptive and so include these kinds of risks in some cases, they aren't the main blocker. Instead it seems price and structure are the main issues blocking ILS funds from embracing these kinds of risks within their portfolios, as there just aren't the deals coming to market, at pricing that would be attractive, or structured in a way that complements on ILS investment strategy it seems.  But Johansmeyer believes there's a need for more capacity, to enable the insurance and reinsurance market for SRCC and other kinds of political violence to function better, with a role for ILS funds in providing some of that, likely on a retrocessional basis to begin.

Interest in parametric risk transfer and insurance is on the rise as the immediacy and availability of data improves and new types of market participants enter the fray, suggesting growth is on the horizon, according to industry experts. We recently held an Artemis Live webcast, titled The Power of Parametric Solutions for Climate Resilience, featuring senior leaders from across the weather risk management and re/insurance space who discussed the expanding parametrics industry. In partnership with the Weather Risk Management Association and supported by our kind sponsor Descartes Underwriting, this Artemis Live webcast featured Julian Roberts, Managing Director, Risk & Analytics, ‎Willis Towers Watson; Alain Lagesse, Director Group Risk Management, LVMH; Daniel Vetter, Head of North America, Descartes Underwriting; and David Whitehead, Co-CEO, Speedwell Weather. Today, parametric risk transfer adoption is accelerating apace, as more granular and abundant data, combined with technology and an increasing number of capacity providers looking to underwrite risk on a parametric basis, collide to heighten the availability of a growing parametric solution set. Against this backdrop, speakers explained that interest in parametric insurance and risk transfer is growing on the back of the availability of data. From the buyers side, Alain Lagesse, Director Group Risk Management, LVMH, highlighted three main reasons, or competitive advantages, that parametrics have over traditional insurance solutions.

James Vickers, Chairman of Willis Re International, part of the global reinsurance broking unit of Willis Towers Watson, joined us to discuss global reinsurance market conditions and opportunities.  In this interview, James Vickers discusses how Willis Re's reinsurance clients are finding market conditions in the context of some steady firming seen across recent renewal seasons.  We discussed global reinsurance capital levels and why, despite the industry being well-capitalised and having bounced back strongly from the pandemic, we continue to see positive rate momentum.  James explained some of the underlying features of reinsurance performance at this time, explaining the challenges that reinsurers face in a low interest rate world. As well as the need for underwriting returns to improve further, particularly when some reinsurers have new capital investors to satisfy at this time.  We also discussed the recent performance of the insurance-linked securities (ILS) market and James explained that he feels ILS funds and investors have learned a lot after some more challenging years, which he feels means the discipline being seen in ILS capital deployment is set to continue.  Finally, James shared his market outlook, saying that he sees no reason for firming rates not to continue at this time.

In this episode we review some of the key facts related to catastrophe bond and related insurance-linked securities (ILS) issuance in the first-quarter of 2021. Catastrophe bond and related ILS issuance amounted to $4.63bn as at the end of Q1, making it the third time in the past four years that Q1 issuance has surpassed the $4bn mark. Although down on the record-breaking $5bn issued in the opening quarter of last year, issuance still came in almost $2bn above the ten-year average for the period.  The impressive volume of new risk capital issued in the period came from 27 transactions comprised of 44 tranches of notes. Of this, a significant 22 transactions with a combined value of roughly $2.8bn covered catastrophe risks, which accounts for over 60% of issuance. Mortgage ILS issuance was also strong in the quarter, while the volume of private deals and non-cat ILS also increased year-on-year.  In 2021, the majority of first-quarter issuance came from repeat sponsors, including a mix of regular market participants and others returning for just their second or third time in the market’s history. First time sponsors this year included Universal (UPCIC) and the Danish Red Cross. 

For our latest Artemis Live interview we wanted to take a deep-dive into into the recent severe winter weather and deep freeze event that affected a significant proportion of the United States in February, hitting Texas particularly hard.  Early estimates suggested the potential for the insurance and reinsurance market, including insurance-linked securities (ILS) funds, to face losses of $15bn to $20bn.  Over the last couple of weeks estimates have been coming down slightly, as greater clarity on the losses emerged, particularly with some reporting from the major nationwide insurance carriers most exposed in Texas.  To help me dive deeper into the insurance claims environment related to this event, we invited two senior Verisk Analytics execs with years of experience on the claims-side of the market, Mike Fulton, President of Xactware and Tom Johansmeyer, Head of PCS to this interview.  The pair explained why the winter storm and freezing weather does not seem to be driving an insurance and reinsurance industry loss as high as early predictions had suggested.  But Fulton of Xactware also explained the scale of the claims deluge his firm's systems saw coming in, with huge numbers of claims seen flowing from Texas and the surrounding area.  Fulton said that a typical February might see around 400,000 claims in Xactware's systems from across the US, but in 2021 the company saw nearly a million claims assignments logged.  "More than half of those (claims) being from freezing weather and burst pipes," Fulton explained. "Roughly 30% of those 1 million claims, were due to what we believe to be freeze claims in Texas alone.  "So the impact when comparing to a normal year, for the personal lines market, was really significant."  We also discussed business interruption and the Johansmeyer of PCS said that the BI component of this winter storm loss hasn't manifested to the degree some feared, although some BI claims are anticipated.

This episode features a discussion exploring the use of technology within insurance and reinsurance markets, in particular how reinsurance outcomes can be improved for ceding companies with the use of tech.  This was a session from our Prospectus 2021 event, the new annual reinsurance and insurance-linked securities (ILS) conference brought to you by Artemis in collaboration with sister title Reinsurance News in November 2020.  Panellists included Sean Bourgeois, Founder & CEO, Tremor Technologies, Inc., Claude Yoder, Head of Analytics, Lockton Re, and Carol Pierce, Senior Director, Insurance, Kroll Bond Rating Agency (KBRA).  The trio of industry specialists emphasised that while progress is being made, the industry’s ability to leverage advanced technology and analytics for improvements remains in its infancy, suggesting there’s much more to come.  Later in the session, the topic of standardisation was raised and specifically, whether heightened standardisation as a result of tech-driven risk transfer solutions means that eventually, we get to a point where capital markets investors can participate more readily.  Sean Bourgeois of Tremor explained the level of sophistication of many players in the insurance and reinsurance space and the distinct opportunity in making it easier for them to access capital, or allocate to risk, in its current as well as future perhaps more standardised forms.  Technology can do a lot for the reinsurance market in its current guise and suite of products, before even considering broader standardisation, he explained.