Aon’s Schultz: 2023 will see cat bond issuances return to “record levels” at $11bn+

Cat bond issuance levels are expected to reach record levels in 2023 with Aon Securities CEO Paul Schultz predicting north of $11bn as a “reasonable outcome” following a muted end to 2022 as a result of investor uncertainty and frustrations.

Speaking on The Insurer TV’s latest Close Quarter episode, Schultz argued this can be achieved if transaction sizes can return to “more customary levels” as opposed to last year’s downsizing.

The cat bond market saw a lower-than-average $1.6bn of issuance in the fourth quarter of 2022, but the full-year total still reached $10.5bn.

“When we look at the potential issuance amount for cat bonds, I think we see $11bn+ as a reasonable outcome this year, which I think we would be on pace to potentially set a new kind of issuance record for the market in 2023, if we could get above some of those numbers,” he said.

“Quite frankly, we're seeing demands come across the market from reinsurers, we're seeing demand coming from insurers, we're seeing demand coming from governmental types of issuers as well.”

Schultz rejected the idea that heightened cat bond prices would act as a deterrent to issuers.

Instead, he pointed to the enhanced value of diversification in tougher market conditions, which, he believes, will result in greater cat bond involvement over simply traditional reinsurance structures.

Schultz predicted that increased volume will be defined by an uptick in non-property issuance, with investors indicating “a keen level of interest to expand the securitised market into more things than just property”.

During last week’s Bermuda Risk Summit a panel of ILS experts reaffirmed this, saying the ILS market needed to respond to investor “nat-cat fatigue” and provide other diversification solutions.

Beazley’s January launch of its unprecedented cyber cat bond was a significant move earlier this year, but Schultz added “we are certainly talking about more than just cyber”.

Whilst Schultz remained coy on revealing the specific business lines Aon is working on, he underlined there are “some very interesting growth parts” in the market with a number of “new specialty risks”.

This expansion into non-property segments reflects “a maturation” of the ILS space, which Schultz said will “lend to the sustainability or build durability of this asset class”.

Non-cat areas which are attracting ILS investor interest include some financial and credit lines, cyber, intellectual property and some casualty.

He continued: “What's great about the market is it's large enough now that we don't need the entire market to support something. If we want to do something more innovative today, we can pull together a half a dozen investors.”

ESG needs tangible and measurable outcomes

For ESG bonds to embed themselves across ILS strategies, Schultz argued there must be a “measurable or tangible” way to assess whether a bond’s ESG compliance makes a measurable difference to pricing.

He suggested the ILS market has not “been able to articulate that in terms of pricing” or “in terms of capacity.”

Schultz added that if we can get to a point where a more ESG-compliant offering can see some measurable difference “it will quicken the pace” of ESG adoption in the marketplace.

He concluded that whilst “several clients” had confirmed the intention to go further once “tangible benefits” were unveiled, he had not seen “an investor response that validates” this.

If this assessment is accurate, it seems the industry will continue to want “to be seen as promoting ESG bonds” without making the necessary implementations.