Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Cat bond market can expand with new perils and regions: Swiss Re


Reinsurer Swiss Re held a media event yesterday at which they discussed trends in the insurance-linked securities, catastrophe bond and reinsurance convergence markets, how the market has developed in 2012 and a few thoughts on where the market can develop further in 2013 and beyond. Encouragingly Swiss Re seem very confident on the cat bond and ILS markets ability to expand, with new perils and new regions of the world offering the market a chance to grow.

After a very healthy year for the cat bond and ILS market in 2012, with issuance set to be the second highest on record and the size of the outstanding cat bond and ILS market also at the second highest level ever, the market now has a chance to consolidate and continue that growth through 2013.

Outright growth for the market should be possible again in 2013 as there are just $3.4 billion of cat bonds scheduled to mature and many of them are from repeat sponsors who are likely to return to the market again. That means incremental issuance and new sponsors will drive the growth of the market in 2013 and Swiss Re is confident that the cat bond market can expand.

One way the market can grow is through innovation, something Swiss Re have helped to facilitate by bringing new sponsors, investors, regions and perils into the market over the years and by customising transaction structures to meet specific investor or sponsor needs. Swiss Re said they are committed to helping the cat bond and ILS market continue to move forwards, through innovation and expansion of the perils and regions currently covered in the ILS universe.

Swiss Re said that the ILS pricing environment will help to foster growth, with the stabilisation of pricing and also the convergence of ILS and cat bond prices with traditional sources of reinsurance cover favorable factors for growth in markets outside the U.S. The pricing environment also makes it more possible that new perils and regions will be introduced to the market as well, it’s financially less risky for sponsors and investors certainly have the appetite for new perils and regional risks to assist portfolio diversification.

Over the short-term, Swiss Re highlighted flood risk as a likely candidate for the cat bond market. Flood catastrophe bonds are a topic we have written about regularly here on Artemis, suggesting it is just a matter of time before we see a deal come to market. Swiss Re seem to agree on this, saying that external models and data availability is improving which are necessary developments if a capital market for flood risk was to emerge through securitization. They highlight the PERILS AG initiative, with the availability of a UK flood index and high-resolution Satellite Flood Footprints both positive developments which could lead to the issuance of flood cat bonds.

Swiss Re said that they see potential for flood cat bonds to be structured on both a per occurrence or aggregate basis. This is a positive comment as aggregate flood cat bonds would be well suited to property insurers in countries such as the UK, while per occurrence coverage may better suit large reinsurers with significant flood exposures in specific regions of Europe. Swiss Re also said they see the potential for flood risk to be combined with European windstorm risk in a cat bond, which makes a lot of sense and could also be a way to cover the storm surge component of a European windstorm.

Over the longer term Swiss Re said they foresee the development of ILS or cat bond solutions in Asia, outside of Japan where the only Asian cat bonds have been issued to date. The sheer amount of exposure to natural perils, such as earthquakes and typhoons, in Asia makes it a prime candidate for cat bond market expansion. There are of course other perils in Asia, such as flooding, which can create losses large enough for the cat bond market to become a candidate for their risk transfer. Swiss Re also cited South American earthquake risk as another potential candidate peril for the cat bond market which also makes a lot of sense given the size of the exposures in that region and the success of Mexico’s MultiCat cat bond deals.

Expansion of the cat bond and ILS market is inevitable, with it being more a question of when, rather than if, it will happen. With firms like Swiss Re pushing for this, and ready to help any sponsors brave enough to be the first to issue new cat bond perils and regions, we’d hope to see some more innovative attempts to further the markets growth in 2013.

Read our article from yesterday on Swiss Re’s event:

2012 see’s catastrophe bond market return to growth: Swiss Re

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