The risks that make up the catastrophe bond market & how cat bond capacity is split

by Artemis on August 19, 2010

Sometimes you could be forgiven for thinking that the catastrophe bond and insurance-linked securities market is made up of nothing but U.S. hurricane risks. Around 85% of all new cat bond issuance in 2010 has been linked to U.S. wind and we saw a similar amount issued last year. Hurricane risks seem to get the news despite the clamour from investors for diversification opportunities. Despite these facts the market for catastrophe risk securitization is actually varied and many types of risks have been issued since its inception.

Swiss Re have published a number of interesting graphs on this subject in their first insurance-linked securities market update.

This first graph (below) shows the different types of risks that have been issued as part of a catastrophe bond transaction between 1997 and 31st July 2010. It’s clear that U.S. wind makes up a large proportion of the market from this as the majority of multiperil transactions contained a portion of hurricane risk. This graph highlights two points for us; that the market is varied and many types of risk do get transferred to the capital markets through cat bonds but also that the opportunities for diversification for investors have been limited by the smaller amount of issuance in other risks.

Risks securitized since 1997 (as of 31 July 2010)

Risks securitized since 1997 (as of 31 July 2010)

This second graph from Swiss Re shows the variety of risks which make up currently available capacity in the catastrophe bond and insurance-linked security market as of 31st July 2010. This paints a slightly different picture as it shows that almost 75% of the markets capacity is made up of diversification opportunities away from U.S. hurricanes for investors who want them. We can only assume that these diversified positions get held by investors and funds making them more difficult to acquire for new market entrants.

Current capacity provided by the capital markets (as of 31 July 2010)

Current capacity provided by the capital markets (as of 31 July 2010)

So as we said earlier in this article, the 2010 ILS market issuance has been dominated by U.S. wind (75%), and 2009 was similarly dominated. That, combined with a habit for investors to hold onto diversification opportunities, would go a long way to explain the difficulty some investors have getting a stake in insurance-linked securities which is outside of U.S. wind peak risks.

You can download the full Swiss Re Insurance-Linked Securities Market Update for H1 2010 here.

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