Insurance-Linked Securities Report 2008 - Aon

Indemnity Triggers Reach New Heights
Evolving triggers for U.S. perils offer advantages
Market Trends
Prior to 2005, one could characterize the cat bond market as primarily opportunistic
for both sponsors and investors. During difficult markets when traditional reinsurance
capacity was tight and rates high, sponsors utilized the ILS market for competing
coverage while investors eagerly put capital to work at attractive returns. However,
when reinsurance markets softened and rates declined, so did investors’ appetite for
insurance risk. During the last 18 months, however, the capital markets have become
a more stable source of capacity for risk transfer throughout the reinsurance cycle.
Rise Of Indemnity
CATASTROPHE BOND ISSUANCE VERSUS PERCENT INDEMNITY (Years ending June 30)
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1,071 985 986
2001
2002
2003
Cat Bonds
1,558
2004
1,137
2005
3,124
2006
7,003
2007
% Indemnity Issued
5,815
2008
Aon Capital Markets
Since the beginning of 2006, indemnity issuance has risen considerably. Indemnity
issuance totaled $1.79 billion during the 12-month period ending June 30, 2007, and
$2.75 billion during the following 12 months. By comparison, indemnity triggers
represented just 25 percent of issuance from 1996 to 2006. While overall indemnity
issuance has grown, transaction sizes have increased as well. In 2007, Aon Capital
Markets completed a $1.18 billion for Merna Reinsurance Ltd., representing the
largest-ever indemnity transaction. Finally, the breadth of issuance has also increased
to include new perils such as winter storm and wildfire.
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
15