Interest in catastrophe bonds could increase in Japan: Aon Securities

In the current hard reinsurance market, the multi-year nature of insurance-linked securities (ILS) such as catastrophe bonds is likely to drive increasing interest from sponsors in Japan, Aon Securities has said.

The capital markets unit of the insurance and reinsurance broker noted recently that catastrophe bonds have demonstrated the value of locking in protection over a longer-term in the current rising price environment.

For sponsors that locked in their cat bond coverage before recent reinsurance renewals in Japan, this has helped to mitigate the impacts of price rises across their programs.

Japan’s insurance market has a long history of sponsoring catastrophe bonds as a way to source diversifying reinsurance capacity from the capital markets.

In fact, the first time a Japanese primary insurer sponsored a catastrophe bond that we have listed in the Artemis Deal Directory was way back in 1997, when Tokio Marine came to market with the Parametric Re Ltd. transaction.

Mitsui tested the capital markets with an event-linked swap arrangement in early 1998, after which Yasuda Fire & Marine sponsored the Pacific Re deal later that year.

Since then, we’ve seen repeat Japanese cat bond sponsors come to market, from the buyer of the largest reinsurance program in the world Zenkyoren, to Tokio Marine & Nichido Fire,  the Mitsui companies, and Sompo.

So, there is a long history of the major Japanese property and casualty insurers tapping the cat bond market for reinsurance and these companies likely all benefited at the recent renewals from having staggered maturities of their cat bond coverage.

The effects of this could help to drive further awareness of catastrophe bonds and attract new sponsors, Aon Securities believes.

“In current market conditions, the multi-year nature of catastrophe bonds has demonstrated its value and helped mitigate the impact of increased pricing,” Aon Securities said.

Adding that, “Interest in ILS is likely to increase in Japan, although traditional reinsurance remains competitive in comparison.”

Japanese perils have always been diversifying for the major global reinsurers, which at times can make it harder for the catastrophe bond market and ILS funds to compete.

But in a hard market, where catastrophe reinsurance rates even in Japan have risen so steeply, there is a chance more look to ILS alternatives.

Earthquake excess-of-loss reinsurance rates rose at the April 1st 2023 renewal season, Aon’s Reinsurance Solutions said, while capacity for typhoon and flood risks was more constrained and reinsurers were seen to reduce their appetites for riskier layers.

As a result, risk-adjusted prices for Japanese wind and flood reinsurance rose by double digits, while retention levels and attachment points also increased, although terms were not as stringent as in some other catastrophe markets, Aon’s Reinsurance Solutions noted.

Overall, risk-adjusted rates for catastrophe excess of loss renewals in Japan increased by low double digits, which Aon calls a “substantial increase” for this market.

These dynamics can create an environment where insurers are more open to looking at alternatives, which can ultimately benefit the ILS market.

It’s also worth noting that Japanese corporate insurance buyers also have a track-record for catastrophe bonds, although less in recent years.

With higher reinsurance costs likely to cascade down to these major risk transfer buyers, there is always a chance more will become aware of alternative options, from parametrics to catastrophe bonds.