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Moody’s warns that catastrophe-bond returns may weaken in the reinsurance cycle

Moody’s says the softening global reinsurance market has shifted the risk-return balance in catastrophe bonds and insurance-linked securities.

Reported · Written up by our desk · Reinsurance

Moody’s Ratings says the economics behind catastrophe bonds and insurance-linked securities are evolving with the global reinsurance market cycle, which it links to changing risk appetite and capital dynamics, as catastrophe losses and broader capital market conditions shift. Artemis reports that Moody’s describes a growing outcome of “more risk being assumed for less return” as the cycle softens.

The rating agency also says reinsurance has historically been cyclical, with peaks and troughs driven by factors including loss activity, risk appetite, and market and capital conditions. According to Moody’s discussion highlighted by Artemis, the industry has debated whether cyclicality might fade over time, but the past five years has shown the cycle remains active across both reinsurance and the wider market chain.

While Moody’s notes that risk and capital can move more freely when market “unlock” conditions occur, it says pricing cyclicality has yet to be moderated in a way that would suggest the cycle is ending. Artemis adds that Moody’s believes, provided ILS managers maintain discipline, there is no cause for concern at this stage.

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