The size of the catastrophe bond market

by Artemis on September 15, 2011

Aon Benfield Securities recently published a comprehensive report looking at the catastrophe bond market in the year up to 30th June 2011 (our previous articles on this report here and here). The report contained some excellent visualisations demonstrating the size of the catastrophe bond market over time since 2001. There is always discussion about the size of the cat bond market, whether it is growing or shrinking and what the potential risk transfer capacity provided by cat bonds could be. What better way to display it than in some clear graphs.

This first graph shows the amount of catastrophe bonds outstanding each year and also the cumulative issuance since 2001. This clearly shows that the market has shrunk in terms of outstanding cat bond volume in recent years. It’s currently down by as much as $4.5 billion since the peak year of 2008.

A shrinking catastrophe bond market?

A shrinking catastrophe bond market?

But that’s nothing new, we’re all aware of the difficulties in issuance that were seen since the financial crisis and then the slowdown this year after the Tohoku earthquake and difficult to swallow risk model changes. Here’s a graph which shows the volume of issuance by year. It shows that using Aon Benfield’s year-end of the 30th June, 2011 issuance came very close to the volume of 2010 deals, which is impressive given the Q2 2011 slowdown. It’s also encouraging to see the increased volume of life and health related insurance-linked securities which have come to market in the last year.

Heading for a good year of cat bond issuance?

Heading for a good year of cat bond issuance?

To put the graphs above into context, you need of course to see how many cat bonds are maturing each year. As the majority of cat bonds have a three-year tenure it is clear that the larger the issuance volume the bigger the impact to the outstanding market size three years later. Using Aon Benfield’s year-end of the 30th June it is clear to see from the issuance graph that large amounts of maturities were to be expected during 2010 and 2011.

Lower cat bond maturities next year

Lower cat bond maturities next year

Maturities have been high for the last three years, on Aon Benfield’s figures, but are destined to be much lower during 2012. That will give the market a great chance to return to overall growth. Another couple of billion dollars worth of issuance during the last half of 2011 and a good first half of 2012 could see quite a jump in the volume of cat bonds outstanding. These graphs could look very different at this time next year. The market needs to see growth in order to allow the investors waiting on the sidelines into the market.

You can download the full report from Aon Benfield Securities here.

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