Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Cat bond markets withstand credit crunch


There’s a very interesting article in the press today about the impact (or lack of impact) of the current economic climate turmoil to the catastrophe bond market. It reiterates what has been said many times over the last few weeks; that the market in insurance-linked securities is highly liquid and investors are perhaps treating cat bonds as a safe harbour for their money at a time when other markets are seen as risky.

There are a number of interesting points in the article which I’ll detail here:

  • Goldman Sachs estimates trading volumes in the secondary market are up 35% over last year.
  • Swiss Re’s volumes totaled about $1B in March alone. 2007 amounted to only $2B in total.
  • The lack of major catastrophes in recent years continues to make the market attractive to investors.
  • The cat bond market is a great place to diversify your investments into an instrument which has little room for leverage by dealers.

You can read the full article here.

This strong demand by investors does not seem to be encouraging issuers to step forwards. Cat bond issuance is down on last year mainly due to the availability of cheaper reinsurance and lack of large catastrophes of late. However, by the end of the year we expect issuance to be on a par with last year.

It will be interesting to see if the increasing losses caused by floods, tornadoes and hail in the U.S. begin to feature more within catastrophe risk transfer transactions. The current losses are looking very high so it would seem natural to try to securitize your risks in these areas as well as the more traditional hurricane risks. A move by reinsurers towards multiple-peril bonds could help issuance rise more quickly.

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