December 11, 2023

One of the interesting trends in the cat bond market in recent years, and a clear response to the loss activity experienced, is the shift away from aggregate coverage of cat bonds to a per-occurrence structure, becoming the more dominant form seen.

We can imagine this gradual shift from gross reinsurance and retrocession exposure, which accounted for the lion’s share of the cat bond market, to the now more prevalent reinsurance and retrocession structures that occur on a per-casual basis.

use Artemis’ range of cat bonds and insurance-linked securities (ILS) charts and visualizationswe can clearly see how this trend develops.

The shift in investor demand was driven by investors taking losses in catastrophe bonds and other insurance-linked securities (ILS) instruments due to a concentration of smaller disasters and severe weather events since 2017.

Changes in the way aggregation structures are attached and the shift from franchise deductibles to event deductibles, combined with a decline in investor interest in aggregates in certain quarters, have driven a shift in the cat bond market.

At one stage, the outstanding cat bond market comprised nearly 60% of all cat bond transactions.

In March 2019, the market was broken down in terms of aggregate and occurrence as follows:

Cat Bond Market, Total Incidence Breakdown, March 2019

By September of that year, the share of synthetic catastrophe bonds had increased further, approaching the 60% mark, a figure it did reach for a short period of time a few weeks later, according to Artemis.

Cat Bond Market, Total Incidence Breakdown, September 2019

However, a year later, in the third quarter of 2020, things started to change, as more pay-per-use deals started flowing into the cat bond market and the needle returned to happening reinsurance and retroactives, making investors feel Happy.

October 2020 Catastrophe Bond Market Aggregate Incidence Breakdown

This shift continues through March 2021, with the total cat bond volume gradually becoming a smaller component of the outstanding cat bond market.

Cat Bond Market, Total Incidence Split, March 2021

After a period of stronger issuance and maturities, the market became more even in June 2021, with just over half of the outstanding venture capital aggregated.

Cat Bond Market, Total Incidence Split, June 2021

According to Artemis, the shift is well underway through November 2021, and appears to be moving faster as each occurrence structure becomes a major component of the outstanding cat bond market.

November 2021 Catastrophe Bond Market Aggregate Incidence Breakdown

Another year passes, and by early Q4 2022, things have stabilized for a while, and more aggregation structures with event deductibles start to come to market and gain greater investor popularity.

September 2022 Catastrophe Bond Market Aggregate Incidence Breakdown

But then, as the hard reinsurance market ensues, the total catastrophe bond market begins to shrink again by the end of Q1 2023.

Cat Bond Market, Total Incidence Split May 2023

According to our data, this continues now, with the structure and coverage of each occurrence remaining the largest component of the outstanding cat bond market beginning in June 2023.

Aggregation Happens - Cat Bonds - Jun2023

Two weeks later, the percentages have remained the same, and despite the large number of maturities and some new issuance, it appears that the cat bond market may be starting to find somewhere between general reinsurance and retro structures and the now more popular per-occurrence cat bonds Balance notes.

Overall, there has been a roughly 13% shift since the end of 2019, from about 60% total and 40% incidence to just over 47% total and nearly 53% incidence.

It will be interesting to see if this is still balanced, or if the aggregate structure becomes popular again, as promoters clearly still want this type of coverage, and the cat bond market is a viable source for it, under the right conditions Down.

The data supporting our graph was collected by Artemis during the 25 years that the catastrophe bond market existed, now backed by over $150 billion in issuance, all in Artemis Transaction Catalog.

You can access all of Artemis’ cat bond market reports here and analyze our data with charts and visualizations here.

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