Catastrophe bond issuance hit a record high of $1.6bn in the third quarter this year, beating the former third quarter record of $1.4bn in 2013, according to an insurance-linked securities (ILS) report from Willis Re, the reinsurance division of Willis Towers Watson.
The amount of issuance is well ahead of the five-year average of $800m and puts the year's total issuance—already at $8.7bn by the end of September—in a position to beat last year's $9.7bn full-year record. Notable ILS issuance during the quarter included cover for new perils: $500m for flood resulting from US wind, and $200m for California wildfire liability.
Meanwhile, the market continues its move away from index triggers to indemnity-based structures with 60% of bonds issued this year triggered by issuers' own losses, compared to just 40% in 2008. The move has been driven by improved data, transparency, and understanding of indemnity risk, rather than any inherent discomfort with index triggers, the report said.
However, index triggers remain important. Based on a proxy for actual loss, they remain common for retrocession cat bonds and industry loss warranties (ILW). In addition, when underlying data quality is poor or the coverage is exceptionally difficult to model, index-trigger discounts often rise considerably, making the structures more attractive, as seen with recent sovereign natural catastrophe and extreme mortality ILS deals.
The trend away from non-indemnity triggers is likely to continue. "As the insurance, reinsurance, and ILS markets work together to solve new problems for insureds, index triggers are a very useful tool to consider," said William Dubinsky, managing director and head of ILS at Willis Re. "They may not, on their own, close the global protection gap, dramatically grow the ILS market, or solve all cedant problems, but with creativity, unbiased advice, and sustained effort, they can still have a meaningful impact."