Capital constraints and rate rises could spawn catastrophe bonds

The reinsurance market is just coming to terms with the current economic climate and the recent large catastrophe losses according to a report from Standard & Poor’s. Reinsurers have been through a period where they have been able to build up capital but that came to an abrupt end this year and with final catastrophe losses still to be determined from recent hurricanes the prospect of rate rises could mean a resurgence in the catastrophe bond market.

Retrocessional capacity scarcity and reinsurers becoming increasingly risk averse (in a time of financial uncertainty regarding their assets) could spur the cat bond market into action again (after a quiet second half to the year). S&P say that catastrophe bond sponsors may be more willing to work with index-based triggers as those instruments become viewed more as a type of contingent capital and less as a substitute for retro capacity.

Rate increases of 5-10% are expected bringing the period of cheap reinsurance availability to an abrupt end which should make catastrophe bonds and insurance linked securities much more attractive to bring to market.

The full report from S&P ‘Global Reinsurance: Excess Capital Absorbs The Shock To Date; But There Is Limited Further Margin For Error‘ can be accessed on their website for Ratings Direct subscribers.