A swine flu pandemic and the catastrophe bond market

by Artemis on April 28, 2009

The catastrophe bond market issuers and investors will all be keeping a watchful eye on the development of the swine flu outbreak with some nervousness. Why you might wonder, given that the vast majority of our coverage of the catastrophe bond market relates to natural disasters such as windstorms and earthquakes? Well, there is another side to the insurance linked security market which relates to mortality risks and covers the outbreak of pandemics as one of the potential causes of a large increase in life/mortality losses.

To date there has been in excess of $2b worth of these mortality bonds issued in the marketplace with around $1.4b of deals still active and yet to mature. Swiss Re has issued the majority of these through it’s Vita Capital series of transactions, Munich Re also has it’s Nathan Re deal in effect and Axa has it’s Osiris series.

For any pandemic outbreak of swine flu to affect these deals there would have to be a serious loss of life, they are designed to provide cover for those once in a hundred year events which cause devastating losses and would cause reinsurers to go out of business. We’re talking an event which causes millions of fatalities.

So for the moment the market must just keep a watchful eye on the situation and also watch how the notes from these deals trade as the swine flu story progresses. The rest of the life insurance and reinsurance industry will also be keeping a close eye on swine flu as any pandemic would be devastating to the industry.

Guy Carpenter has some excellent information on the mortality sector of the cat bond market in this article on the GCCapitalIdeas blog including the below table which shows the outstanding deals (click the image to see a larger version).

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