Australian general insurers may launch catastrophe bonds

by Artemis on April 4, 2011

As we’ve discussed a number of times on Artemis since the flood disaster in Queensland, Cyclone Yassi and the earthquake in New Zealand; it’s likely that we will begin to see more catastrophe bond deals with exposure to risks in Australia coming to market. Insurers in the region have suffered significant losses, some of which haven’t been picked up by reinsurance so cat bonds seem a good alternative for them. Now Australian newspapers are suggesting the same.

The Sydney Morning Herald reports that Australia’s big general insurers are said to be considering issuing their own catastrophe bonds to hedge the risks of further disasters down under and to help offset rising reinsurance costs. Insurance Australia Group (IAG) is said to have already ‘run the numbers’ over a cat bond issue. Suncorp Group is said to be considering tapping the market directly too. Any cat bonds issued would be a small part of their overall reinsurance mix but potentially a valuable one.

The cost of reinsurance has been rising in Australia since the disasters earlier this year with some prices said to have increased by 10% to 15%. This makes issuing a cat bond a viable alternative even for direct general insurers. It is possible that we’ll see the actual issuance undertaken by a global reinsurer on behalf of one of Australia’s general insurers as this may be easier for them to achieve and fit better within a reinsurance program.

It’s encouraging to see that catastrophe bonds are being considered in new markets. With losses on the way from Japan it will be more important than ever for investors to achieve diversification in their catastrophe bond portfolios.

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