2017 losses should not stymie search for ILS innovation

With the $10 billion threshold for annual ILS issuance finally pierced in 2017, it’s time for the global risk transfer community to make ‘catastrophe bonds phase II’ a reality, according to the quarterly PCS Q4 2017 Catastrophe Bond Report, authored by Tom Johansmeyer, assistant vice president, PCS Strategy and Development.

The report notes that catastrophe bond issuance activity has set new records with every transaction since early last summer, when an unprecedented second quarter pushed 2017’s totals above $10.5 billion.

“But now, with a full year behind us, we have a final answer to the question of how much capital can be raised through catastrophe bonds in a single year,” the report said. “Last year’s record-setting issuance beat the next most active year (2014 at $7.8 billion) by more than 33 percent. As a market, though, we’re becoming desensitized to these big numbers—even if new limit declined the two years following 2014. Of course, 2017 was so large as to become fundamentally different from prior years.

“With the $10 billion threshold finally pierced, it’s time for the global reinsurance and insurance-linked securities (ILS) community to stop contemplating what comes next and really put some effort into making “catastrophe bonds phase II” a reality,” the report said.

It notes that until the end of August 2017, there was no shortage of talk about innovation, market expansion, new lines of business, new regions. A protracted soft market made such thinking crucial to driving long-term growth. Without a major catastrophe, the reasoning routinely went, the market would need to find other forms of risk.

“And then Hurricane Harvey made landfall. And Hurricane Irma. And Hurricane Maria,” the report said. “That’s when everything changed. Innovative ideas took a back seat to sorting out a series of significant catastrophe losses—a process that may go on for a while.

“Three hurricanes and two wildfires were large enough from even preliminary estimates to be considered relevant to the global reinsurance market. It looks like 2017 will be one of the largest catastrophe loss years in the nearly 70-year history of PCS. Because of this, new ideas get shelved while the core business of today is addressed.”

On this basis, Johansmeyer suggests it would be prudent for the global risk transfer community to remember the types of discussions it had in July and August, particularly around global specialty lines.

“And while we do need to work through the major events that occurred in the third and fourth quarters last year, we should try to maintain a balance that includes fueling new solutions that bring original risk into the market. Sooner or later, the market will soften again, and if we don’t invest for that eventuality, the market will have no choice but to endure the slipping rates and looser terms that tend to prove problematic in the long run,” the report said.

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