As this report shows, fourth-quarter catastrophe bond issuance significantly dropped year-on-year and came in below the ten-year average for the quarter.

As the market navigates what’s expected to be a very late and prolonged reinsurance renewals season, the usual flurry of start-ups and capital raises is nowhere to be seen. After all, it’s said that investor sentiment is cautious.

In light of this, we spoke with Appleby’s Adderley about cat bond market dynamics and what this means for issuance in 2023.

“For me, the fact that certain deals have not been done this year-end, compared to the days where all deals would always get done, leads me to question if 2023 can be another record year,” said Adderley.

“On top of this, it could also be the case that less people come to the market because they’ve heard stories that deals aren’t getting completed,” he added.

Reinsurance rates, notably for catastrophe-exposed lines, are expected to increase significantly at the January 1st renewals and beyond, and Adderley feels that price is playing its part in the cat bond market.

“I don’t think, until people actually see the price and see the actual terms, that they really compute what they read in the press, to what they actually get. And, by the way, they also don’t realise that if they don’t accept the offer, there might not be another one.”

“We’ve come from a market where the buyer drives the terms, right. Every year the buyer got better terms and every year the buyer got lower prices. Plus, the buyer always got coverage. So, it was a triple win. Now, you don’t drive the terms, you don’t drive the pricing, and by the way, you might not even get coverage.”

“We were hearing of deals not getting done in June, and that was before Hurricane Ian, that was before more inflation and higher interest rates; June was before more escalation in Ukraine. So, if that was June, how many deals are not going to get done this January renewals?” said Adderley.

Expanding on this, Adderley told Artemis that he thinks it could also be the case that people are assuming it makes no difference whether or not they’re in the market for 1/1, given the fact so many people are trying to make sense of the market.

“So, I wonder if buyers and capacity providers are first waiting to see what’s going to happen. And, so, as a result, maybe this year you’re going to see a lot more deals get done in January because people are thinking, well, we don’t know what the right price is, we don’t know how it’s all going to play out, so we’re going to wait and see what happens.”

“However, if we all agree that there’s less reinsurance capacity, then if you wait too long, there’s even more of a reason why there’s going to be less capacity,” he explained.

In previous hard markets, a flurry of new Class 4s would launch in Bermuda, which alongside capital raises from existing
players, would fill a sizeable portion of the gap left by prior year losses.

However, this just hasn’t been the case this year ahead of 2023, although Adderley is confident that at some point, capital will enter the marketplace.

“I think that money will come in, but I don’t think it is going to rush,” said Adderley. “At the end of the day, I don’t think there’s enough information out for the investors.”

Adding, “It’s a beautiful, perfect storm and, obviously, more capital will come in, it will have to in order to account for the hundreds of billions of dollars that have been lost in the last four / five years.”

“So, at a certain point, you can’t have this industry continue to lose money and expect more money to come in. And even if $20 billion came in, is that really going to move the needle?”

“I expect this hard market could last for three to five years so something to keep our eye on.”

Click here to view the full report.

First Published In Artemis, January 2023

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