European catastrophe bond market could grow due to economic climate

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We covered two interesting insights from Aon Benfield’s recently published ILS Second Quarter Update 2011 report last week when we wrote about the Aon Benfield ILS indices and the heightened interest in catastrophe bonds among Japanese insurers. A third insight from the report looks at the cat bond market in Europe and the potential for growth.

Aon Benfield says in the report that the traditional reinsurance market continues to offer competitive pricing for European perils which makes the capital markets a less compelling proposition for sponsors. Despite that fact we have seen a number of European windstorm catastrophe bonds come to market this year (details of them can be found in our Deal Directory). Aon Benfield suggest that the competitiveness of traditional reinsurance for European perils could change due to the economic instability being experienced across the Euro zone thanks to the sovereign debt crisis.

They say that the fallout from economic events combined with the accumulation of heavy global catastrophe losses could help to increase convergence between the reinsurance and capital markets within Europe. The economic crisis in Europe could lead to investment losses across financial markets including to assets held by insurers. Any investment losses suffered combined with catastrophe losses could be sufficient to diminish claims paying resources enough to impact traditional reinsurance market pricing. When reinsurance pricing rises capital markets risk transfer becomes a more attractive proposition, particularly the multi-year, collateralised nature of catastrophe bonds and insurance-linked securities.

Aon Benfield say that such a situation in the markets could lead to incremental issuance of cat bonds in the future, especially with the impending Solvency II legislation which will put a much greater focus on counterparty risk. Also, we would say that the fact that issuance is still occurring at a time when reinsurance is competitively priced suggests that it could accelerate significantly once reinsurance prices rise across Europe.

You can access the full report here.

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