ILS instruments have a “greater role to play” as reinsurers restrict catastrophe coverage 

Following multiple years of large catastrophe (cat) losses, reinsurers are raising prices and pulling back cat reinsurance coverage. This puts the cat bond market in a favourable position to provide the large amount of risk capital needed to cover the most damaging global catastrophes, according to a report from DBRS Morningstar.

It expects a moderate decrease in cat bond issuances in H1 2023 following the rapid rise in interest rates. However, sustained demand for cat risk transfer should support a return to the trend of strong volume growth observed in the last 20 years.

“While P&C insurers have generally performed well in recent years, catastrophe experience has been challenging for the industry as 2022 marked the second consecutive year where global catastrophe insured losses exceeded $100 billion,” said Patrick Douville, vice president, Insurance. 

”Most reinsurers have responded by substantially increasing rates for cat coverage, with some going even further and reducing exposure to problematic lines.

”In this context, cat bonds and other alternative risk transfer instruments may have a greater role to play going forward as reinsurers restrict coverage and additional sources of risk absorbing capital are needed.”

Despite the uncertain issuance environment going into 2023 with rising interest rates, cat bonds are expected to continue to absorb a growing share of the cat risk over time as traditional reinsurers are unwilling or unable to provide the capacity needed by direct writers.

Cat bonds have become a popular medium of transferring catastrophe risk given their advantages in current environmental and economic conditions. 

In addition to opening up a new source of capital to help mitigate high claim payouts, cat bonds have also allowed insurers to obtain reinsurance coverage in a flexible and transparent way.