The market for risk-linked securities (RLS), or catastrophe bonds, has grown into a viable source of funding for large catastrophe exposures and other risks, particularly where coverage is problematic to secure in traditional insurance markets. Several dedicated risk-linked securities funds have catalyzed a rise in capacity and have made placement of RLS more efficient. Yet issuance has been slow to fill the new capacity even as spreads have tightened significantly.
Although outstanding issuance has grown somewhat steadily over the last ten years, all growth since 2001 can be attributed to two sponsors, while issuance by others has actually been declining at a double digit rate. RLS transactions continue to appear as a succession of experiments, the majority of which have resulted in nonrenewal. Why does the market look so imbalanced? If the RLS market is offering greater capacity and spreads are declining, why does issuance continue to stagnate? To be sure, market growth figures may be understated as several players have noted an increase in private transactions outside the more highly publicized 144A market. However, private transactions are not enough to bring about the robust flow market that many imagined in the late 1990s.
The future of the RLS market continues to be driven by factors outside the control of its biggest stakeholders. While short term influences have weighed the market down, more permanent developments create a fertile environment for growing innovative risk transfer products. Most notably, demographics and technological developments indicate a promising long term outlook for the fledgling market. At the same time, in Fount's view, most conventional market players have the wrong capital structure to fully realize opportunities that have arisen in the issuance market. Fount believes that the risk transfer markets are on the brink of unprecedented innovation and growth in precisely the areas that conventional players ignore—with good reason—for being unprofitable. Fount's upcoming publication, A New Approach to Risk Transfer and Capital Markets, serves as a guide to the future of risk transfer markets, presenting a vision and ideas for entrepreneurs and insights into how conventional players can profitably prepare for upcoming developments. The publication will be available through our web site soon.
From time to time, Fount will provide web access to various publications detailing our unique approach to the risk-linked securities (RLS) market and related topics. See the "Insights" section of our home page or contact Fount for more information.