A lack of Atlantic Hurricane storm activity, with no major US hurricanes making landfall to trouble re/insurance markets since Hurricane Beryl, which made landfall in Southeast Texas on July 8.
That could of course change as the season continues, not least with Hurricane Francine strengthens, nearing hurricane status in the Gulf of Mexico, headed towards Louisiana.
But provided the season continues to run quietly, Schultz (pictured) provided his view on how he expected the rest of 2024 to play out for the cat bond market, following strong momentum and record issuance in play in the first part of the year.
“The pipeline going into the second half of year is pretty good, so we’re anticipating a strong end of the year, to some extent regardless of market impacts,” said Paul Schultz, CEO of Aon Securities, speaking with GR in Monte Carlo.
“Part of that reason is that the risk return proposition or thesis to the investors is strong. It’s good from a historical perspective, and it’s also good compared to other asset strategies,” he said.
The high yield bonds that investors might otherwise choose to invest in do not offer non-correlation of risks, while their relative return is also in competition.
“On a relative basis, it’s still an attractive place to allocate investor capital. We still get the benefit of the non-correlation plus the relative return, and that has kept inflows into the market very healthy. That’s been the case now for basically the last 18 months,” Schulz said.
Governments and NGOs
A recurring theme of RVS 2024 has been the potential new business for reinsurers that may come from government, non-governmental organisations, (NGOs) and public private partnerships seeking reinsurance or ILS to transfer risks into the commercial sector.
“What we’ve seen this year is activity from the World Bank sponsored transactions,” Schultz said.
For instance, the World Bank issued a cat bond that provides the Government of Jamaica with $185m of insurance cover for three hurricane seasons from 2021 and ending in December 2023.
In February 2024, the World Bank announced an expansion of the use of cat bonds, reinsurance and parametric risk transfer for countries exposed to natural disasters, wanting to embed nat cat re/insurance and ILS more deeply into its financing operations.
By June, the World Bank had facilitated and issued at least $4.8bn in cat bonds across 17 transactions, with $745m issued in just a few weeks in 2024 to support Mexico as well as Jamaica.
“We did a transaction for Puerto Rico as well,” Schultz said, referring to the Parametric Re cat bond that by June 2024 had grown to $85m in size.
“If we look back over the last couple of years, we’ve seen greater governmental and NGO participation in ILS schemes, and as we look forward, we expect that trend to continue and grow,” Schultz said.
“The World Bank is a very strong advocate for their member countries, and it’s a way to boost resilience in those economies after nat cat events. They’re very strong proponents, and then we like the environment, social, governance (ESG) aspects of trying to grow this market,” he added.
Casualty ILS
Another theme of RVS 2024 has been US casualty reinsurance – although usually not in a flattering light – with conversations tending to focus on inadequate rises in pricing relative to claims rises, primarily due to social inflation.
“The other thing I would mention, to be somewhat intriguing, is that we do see casualty ILS as a growing part of the [ILS] market. They’re most likely not going to be cat bonds; they’re more likely to be in structures that would more resemble sidecars,” Schultz said.
“We’re probably still in baby steps on that, and I was talking about cyber cat bonds a few years before they actually happened. Casualty ILS is conceptually interesting to both those transferring risks as well as asset managers that would like to manage the assets underneath that are sitting below those casualty transactions,” he added.
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