January 1 2017 Pricing Data

Reinsurance rates are at long term lows and have slipped again at the key January 1 renewal date. Following a stable period, new catastrophe bonds also priced at lower risk-adjusted rates in 2016 compared with 2015. Optimists noted that rate reductions were less than previous years - particularly in the key US market.

Over 15 years of cat bond pricing history can be viewed in the InsuranceLinked Cat Bond Pricing Explorer. The loss on line (expected loss divided by the principal) of cat bonds has been drifting upwards since the earliest trasnsactions. In 2016 there were seven bonds with an loss on line greater than 8% versus zero in 2015. This caused the market average to peak at 3.4% which is almost five times the average in January 2002.

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The orange line in the chart below uses a linear regression on the trailing 12 months of primary issues to plot the implied spread of 2% loss on line (this article explains the methodology). The price of 2% risk has been steady at 5% for some time but has now begun to fall. The most recent (fourth quarter) issues indicate show the greatest reductions. Guy Carpenter observed decreases as high as 30% in the ILS market during Q4 2016.

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Guy Carpenter's Global Property Catastrophe Rate-on-Line index fell 3.7% at January 1 2017, compared to 9.0% a year ago. Reinsurance brokers noted that the US market was relatively stable while other territories experienced more significant rate reductions.

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RMS's index of risk-adjusted returns  in the secondary cat bond market closed at its lowest level for four years. The two spikes towards the end of 2016 correspond with periods of uncertainty around Hurricane Matthew and the Gator Re default.

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Posted: Monday, January 2nd, 2017