ILS market shows its new maturity

The recent issuance of a new cat bond by the World Bank Group’s International Bank for Reconstruction and Development (IBRD) covering natural catastrophes in Mexico, demonstrates the further maturity of the ILS sector and an increasing willingness by governments to use this form of risk transfer.

That is the view of Brad Adderley and Gavin Woods, partner and counsel, respectively, at Bermuda law firm Appleby, as they discussed the continued growth and maturity of the ILS sector.

Issued in August 2017, the $360 million bond is designed to provide Mexico’s Fund for Natural Disasters, also known as FONDEN, with financial resources for federal and state reconstruction efforts in the aftermath of earthquakes and tropical cyclones.

“The issuance by the World Bank Group of this latest Mexican cat bond demonstrates the continued growth and development of the international ILS market,” said Woods.

“The issuance of such cat bonds is not done in a vacuum; it requires input from all areas of the international insurance industry—including risk managers, placement agents, arrangers and reinsurers.”

An AM Best briefing on September 8 stated the cat bond could be triggered by the magnitude 8.1 earthquake that struck off the southern coast of Mexico on Thursday (September 7).

Adderley and Woods suggested the issuance of the cat bond reflects the trend of governments using risk transfer strategies of this type to manage risk.

“By accessing the international insurance market, governments are able to transfer the cost of catastrophe insurance cover from the public purse to the capital markets, while providing protection against such disasters,” said Adderley.

He noted that this trend is also exemplified by the success and growth of sovereign catastrophe pools, many of which have utilised a Bermuda-based vehicle.

Examples include the Turkish Catastrophe Insurance Pool-formed Bosphorus 1 Re to transform Turkish earthquake risk; and African Risk Capacity—a risk pool supported by the US, UK, German, Canadian and French governments—designed to provide coverage for tropical cyclone and flood risk for African Union member countries.

Furthermore, Woods noted, the UK government has announced plans to fund insurance coverage for developing countries; and the World Bank and the UK Department for International Development have been involved in a catastrophe swap transaction that will provide the Philippines with protection against typhoons and earthquakes.

Bermuda remains the market leader in the international ILS market, and Woods said he expects this to continue.

The Bermuda Monetary Authority reported that as at the end of Q1 2017, ILS issued from Bermuda represented 73.9 percent ($20.1 billion of $27.1 billion) of total outstanding capacity (a 24.6 percent increase in comparison to activity during the same period last year).

Since 2010, 176 Bermuda-based special purpose insurers have been registered, and the Bermuda Stock Exchange accounted for 77.2 percent of the global market capitalisation of ILS with a total of 84 ILS deals being listed with an aggregate nominal value of approximately $21 billion.

“In Bermuda, we get to see every aspect of an ILS transaction, from vehicles that cover traditional US perils to innovative structures for sovereign catastrophe pools, as well as vehicles for non-traditional risk—such as non-natural disaster risk—and ‘cat bond lite’ structures offering private cat bonds,” said Woods.

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