Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Catastrophe bond market could double in size to $30 billion by 2016


The overall size of the catastrophe bond and insurance-linked securities market grew slightly in 2011 for the first time since the record issuance year of 2007. At the end of the year there was over $12 billion of outstanding catastrophe bonds and over $14 billion of cat bonds and life insurance-linked securities together. Estimates put the amount of outstanding cat bonds and ILS currently somewhere over the $15 billion mark thanks to a particularly first quarter of 2012, but how big could the market get and how quickly could growth happen?

Many participants in the market are hesitant when it comes to making predictions about the future for the cat bond and ILS market, particularly if you ask them to look further ahead than the current year. One person not worried about making a prediction for the potential this market could see in the coming years is Christophe Fritsch, head of insurance-linked securities at Axa Investment Managers. In an interview with Reuters in Paris (which you can read here in French from the Investir website) he discusses the benefits of cat bonds and ILS as an uncorrelated investment opportunity which offers good returns and have low volatility and offer a good risk to benefit ratio.

According to Axa IM data the average yield on cat bonds in 2011 was 7%, compare that to any other investment with a low volatility and it’s easy to see why the asset class is so attractive to investors right now. However, despite this attractive profile as an investment opportunity the cat bond and ILS market has often been thought to be held back by its size and the lack of capacity to accept new inflows of investor capital.

Now this could all be on the cusp of changing according to many in the market. Just last week we published a piece discussing the high inflows of capital to the ILS sector in recent months, $3 to $4 billion according to some estimates. The same article also discusses predictions for $7 billion of issuance in 2012 and the high volume of issuance seen so far this year, now around $1.88 billion and likely to grow before the end of the quarter. With these sorts of numbers in mind, and hearing of ever increasing interest from large investors all over the world, it is beginning to look like we could be seeing the start of a more concerted period of growth for the cat bond and ILS market.

Christophe Fritsch certainly thinks so according to the Reuters France interview. In it he says that the market is bound to expand and is expected to double by 2016 to around $30 billion.

Now that sort of growth would make the next four years in the cat bond and ILS space very interesting! What do you think? Feel free to give us your predictions in the comments below.

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