ILS Market Could Be $150B by 2018, Cat Bonds Likely $50B: BNY Mellon

November 17, 2013

The level of catastrophe bonds outstanding could more than double from the current level of $19 billion to $50 billion by the end of 2018, according to a report from BNY Mellon.

The global provider of investment management and investment services referenced the year-to-date figure from Aon Benfield, while basing estimates on cat bond growth on research it conducted using market data from Artemis.

BNY Mellon published the research in a study titled, “The disaster gap: How insurers and the capital markets can harness big data to close the gap,” last week. In the report, BNY Mellon also estimates the total amount of insurance-linked securities (ILS) outstanding could reach $150 billion by the end of 2018, with $50 billion of that figure expected to include publicly traded cat bonds.

The report predicts a compound annual growth rate (CAGR) of 25 per cent for ILS as an asset class and 20 per cent for cat bonds as a subset of this.

This compares to the CAGR of 24 per cent for ILS over the past 13 years and 30 per cent for cat bonds as a subset over the past nine years.

Globally, natural catastrophes cost the insurance industry approximately $13 billion in the first half of 2013, and the overall economic losses were estimated at around $45 billion, according to an analysis published by Munich Re earlier this year, BNY Mellon noted in a media statement, referring to a global disaster gap of $32 billion

“Insurers and the capital markets can help reduce the disaster gap by working together with big data to deploy new capital to cover new perils in new regions,” said BNY Mellon’s International Head of Insurance Paul Traynor, in the media statement. “This will reduce the cost of rebuilding for governments and provide a positive contribution to society,” Traynor continued.

“Never has the experience of the insurer been needed more; deploying capital against previously uncovered risks requires deep underwriting and technical expertise. This expertise, as well as the comfort that comes from seeing insurers using their own capital, will encourage the capital markets to invest in more cat bonds,” he said.

The report suggests that a combination of legacy and predictive big data models will produce more robust risk modelling for cat bonds. These models should include unstructured data, fast changing data and data generated from an increasing number of sensors, mobile devices and social media applications.

Source: BNY Mellon

BNY Mellon acts as a trustee and paying agent, and collateral agent on cat bonds. It was trustee on 68 per cent of all cat bonds in 2012.