Mitsui Sumitomo to issue catastrophe bonds for Japanese corporates

According to a report, Japanese primary insurance group Mitsui Sumitomo Insurance has launched a service that issues catastrophe bonds for corporations and non-financial companies, from energy utilities to factories, to provide capital markets backed insurance protection.

Typically catastrophe bonds are issued to provide reinsurance or retrocessional reinsurance protection for insurers or reinsurers, but increasingly the application of cat bond technology and securitization is seen as an efficient way for corporations to access insurance capacity.

The Japanese newspaper the Nikkei reported that Mitsui Sumitomo will provide the services and facilities to issue the catastrophe bonds, or debt instruments as they are also described. This essentially sounds like Mitsui Sumitomo using cat bonds to augment capacity for corporate risk transfer buyers.

The cat bonds will feature parametric triggers, linked to the occurrence and severity of a natural disaster event, such as a typhoon or earthquake. The service is being touted as a way for corporations to access capital quickly after a disaster occurs, with no lengthy claims process and funds disbursed quickly to the covered corporation.

The service will provide much-needed capital to Japanese corporations which take up the cat bond product, acting as a source of disaster insurance, contingent capital and business interruption cover, efficiently providing liquidity at times of disaster-induced stress.

The 2011 Tohoku earthquake and tsunami, which devastated large areas of coastal Japan, showed that large corporate operators are particularly exposed to disasters in Japan and that business interruption costs can be significant and have wide-reaching ramifications.

Insurance plays an important role, of course, but a catastrophe bond product with a parametric trigger can respond much more quickly, negating the need for lengthy claims assessment and validation, while also diversifying the post-disaster risk capital required into the capital markets.

The Nikkei explains that Mitsui Sumitomo Insurance will utilise derivative contracts to handle the issuance, through a special purpose vehicle. It’s expected that clients could range from railway operators, to utilities such as electricity or gas suppliers and manufacturers.

Mitsui Sumitomo hopes to issue between 10 billion yen to 20 billion yen ($97.4 million to $194 million) per batch of catastrophe bonds. This suggests that the service will use the catastrophe bonds almost as a way for the insurer to access reinsurance capital, with the derivative contracts providing the cover through to each corporate or non-financial client.

Mitsui Sumitomo has, of course, been using catastrophe bonds for its own reinsurance needs for some years, including typhoon cat bonds such as 2007’s Akibare Ltd. cat bond, 2012’s Akibare II Ltd., and most recently this year’s Akibare Re Ltd. (Series 2016-1).

So tapping the capital markets through catastrophe bond issues in order to provide the capacity to offer corporates a parametric risk transfer product makes a lot of sense.

This development also shows that Mitsui Sumitomo is not afraid to use a third-party source of capital to back products it structures and offers to clients, a shrewd capital-agnostic approach that is perfect for the current reinsurance market and means this peak disaster risk is not held on its own balance-sheet.

We don’t have any more details on the service, or any expected new catastrophe bond issuance as a result of it, but stay tuned and should any new Mitsui Sumitomo cat bonds come to market we’ll be sure to let our readers know.