This year could break records for cat bond issuance: AM Best

AM Best is predicting a record breaking year for cat bond issuance in 2021.

An AM Best report, titled Insurance-Linked Securities Market Weathers Elevated Catastrophe Activity and Global Pandemic in 2020, noted that 2020 was a record year for cat bond issuance. Issuance was driven predominantly by a glut of maturities and new issuers.

With a large number of bonds due to mature this year, however, AM Best believes cat bond issuance in 2021 could eclipse the record breaking levels achieved in 2020.

The insurance-linked securities (ILS) and traditional reinsurance markets overcame “extraordinary losses in 2020” in the January 2021 renewals, with capital now back to pre-pandemic levels of $485 billion, AM Best noted.

That figure, from the end of 2020, comprised $88 billion of ILS capital and $397 billion of traditional reinsurance capital, according to estimates from AM Best and Guy Carpenter.

AM Best’s report highlighted ongoing concerns about the levels of trapped capital in the ILS market, resulting from actual and potential losses from natural catastrophe events before 2020 and the COVID-19 pandemic.

Some cedents accommodated ILS funds by rolling over their collateral into new contracts, rather than trapping it, in anticipation of further COVID-19-related loss developments, AM Best said. It warned there is a risk that ceding companies could ask for the rolled-over collateral if losses emerge unfavorably.

AM Best warned the rollover accommodation by cedents amounts to kicking the can down the road for COVID-19-related losses. Court cases or arbitration in coming months will settle how much, if any, capital can be trapped, based largely on COVID-19-related incurred but not reported reserves, it said, especially for business interruption or event cancellation business.

AM Best also argued that the increased capacity that came to the markets in 2020 at least partially explains why expected rate increases in the retrocession, reinsurance and ILS markets did not materialise in January renewals. The influx of fresh capital mitigated the potential hardening market and helped the reinsurance market operate in a relatively orderly manner during the renewals,” it explained.

“Although the rate increases fell short of expectations in certain segments, they reversed the downward pricing trend of the past few years,” AM Best noted. “The upcoming renewals in April and June of this year in regions that were affected more by natural catastrophe losses will shed more light on whether rate increases will continue.”

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