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After Kizuna Re II, expect more Japanese catastrophe bonds: Moody’s


Credit rating agency Moody’s said in a report that the recent completion of the Kizuna Re II Ltd. catastrophe bond is a credit positive event for sponsor Tokio Marine & Nichido Fire and could spur issuance of more Japanese cat bonds.

Moody’s notes that the Kizuna Re II catastrophe bond is the first time that a cat bond has provided a private insurer with fully collateralized catastrophe protection for Japanese earthquake risk covering commercial and industrial exposures using an indemnity trigger.

This is important, both the use of an indemnity trigger for what more complex risks and simply the fact that it covers more than residential exposures, which have been more typical of other Japan quake cat bonds. Industrial and commercial exposure in Japan is huge, to earthquake and also to other perils such as typhoon risks.

If more of these risks are gradually ceded to the capital markets through cat bonds it will please investors as a source of diversification will grow in the ILS market. However, some investors may not be so keen on the complex nature of industrial or commercial portfolios of risk, so these cat bonds may not be for everyone.

Moody’s explains that since the March 2011 Tohoku earthquake and tsunami, the transfer of Japanese earthquake risks into the traditional reinsurance market has not been a smooth affair. With traditional reinsurance being Japanese property and casualty insurers main source of risk transfer, tapping the capital markets to diversify sources of cover increases in importance.

The use of an indemnity trigger as a protective feature within the cat bond helps to shield Tokio Marine from the basis risk, whereby a non-indemnity catastrophe bond’s trigger does not fully match actual loss, that can arise with the use of index or parametric triggers, commented Moody’s.

The successful completion of Kizuna Re II will also benefit other Japanese property and casualty insurers, said Moody’s. It sets a precedent for transferring commercial and industrial earthquake exposures in Japan to the capital markets, which could benefit the likes of Mitsui Sumitomo Insurance and Sompo Japan in future as well.

Moody’s believes that Japanese insurers like Mitsui and Sompo are also keen to diversify their sources of risk capital for their own earthquake exposures, which may suggest that these insurers will also look to the cat bond market in the future.

Moody’s confirmed, saying that it expects more Japanese insurers to follow Tokio Marine’s lead and issue their own catastrophe bonds, taking advantage of the increasing acceptance of more complex Japanese exposures and the growing appetite for risk in securitised form among institutional investors.

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