Increasing ability to sell catastrophe bonds a bright spot for re/insurance industry: S&P

by Artemis on June 13, 2012

Standard & Poor’s recent insurance conference covered a number of pertinent topics for Artemis readers. Yesterday we covered comments from industry participants on the potential for life insurance-linked securitization to pick up and today we turn to the non-life space with catastrophe bonds and the reinsurance convergence market. One of the stand-out suggestions made during the discussions was that there are signs that 2012 could be a turning point in how the market manages its catastrophe coverage, particularly in Asia.

2011 was the second worst year for natural catastrophe insured losses on record with Asia bearing the brunt of these, but for insurers and reinsurers the industry is evolving to make dealing with catastrophe exposures more manageable, according to the executives involved in S&P’s panel on catastrophe management. In this article we focus on discussions related to cat bonds which were made by  David H. Priebe, vice-chairman of Guy Carpenter and Co. LLC.

They all see a new culture of risk protection emerging in Asia, as realisation that uninsured exposures are growing exponentially and the need to insure and reinsure them becomes more urgent. Catastrophe bonds are cited as an area of growth as insurers and reinsurers look for sources of extra capacity to cover these risks. The new focus on catastrophe risk management and modeling in Asia, along with the increased level of catastrophe bond issuance seen of late, could indicate that 2012 will be a turning point in how much of the industry manages its catastrophe coverage.

One of the highlights of the re/insurance industry right now, according to S&P’s coverage, is its increasing ability to sell catastrophe bonds. David Priebe of Guy Carpenter pointed out the record $3.8 billion of insurance-linked securities sold in Q1 2012 and he expects that to jump to between $5.5 billion and $7 billion by the end of the year, inline with most commentators expectations. This would bring the total amount of outstanding cat bonds and ILS to between $15.5 billion and $17 billion according to Guy Carpenter numbers. A healthy level of growth which will be much welcomed by investors and sponsors alike.

S&P says that insurers have always been looking for more ways to offload risk, and ILS have been a small but growing part of that. Recently it is seeing more growth thanks to a low-interest rate environment which is one of the factors helping to make these securities more attractive to investors (alongside diversification and overall return profiles). Pension funds are the most notable type of investor showing growing interest as they seek higher yields. “We are seeing more interest by pension funds, both as direct buyers and in direct ILS funds,” said Mr. Priebe. “I think we are at a watershed moment in this market.”

S&P finish their article by highlighting that the additional capacity being provided by the ILS market through cat bonds, and also through the reinsurance convergence space, has increased the ability of the industry to cover losses. This increase in industry capacity means flatter pricing, but how long that will last will depend as much on when and how big the next natural disaster is as much as on capital market investors’ ability to assume risks from insurers and reinsurers.

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