Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Catastrophe bond market expected to reach $15 billion within 3 to 5 years


Opinions on the type of growth we can expect to see in the catastrophe bond market seem to be converging on a figure of $15 billion of outstanding cat bonds within the next five years. Currently the cat bond market has about $11 billion of outstanding transactions but market participants are predicting growth and hoping for more deal issuance than deals maturing over the next few years.

Broker Guy Carpenter publicly estimated that the cat bond market would grow to around $15 billion by 2014 and predicted that the capital markets will provide 25% more capital to the reinsurance markets as a whole. The split of how that new capital will flow into reinsurance is not easy to predict but Guy Carpenter thought that catastrophe bonds will see a good proportion of it.

Insurance-linked securities investment manager Twelve Capital have echoed that estimate and predicted that the non-life catastrophe bond market could be worth $15 billion within 3 to 5 years. They see the main drivers to this growth being investor appetite for insurance-linked securities which is growing as investors seek out non-correlated alternative assets and an increasing interest from re/insurers seeking to include ILS in their reinsurance strategy.

Of course the ILS and cat bond market is actually larger than the $11 billion figure which is widely quoted as that only includes the rated, more public transactions and there are at least $500m of private cat bond ILS transactions outstanding (possibly more). Some investment managers predict that the private deals will see more growth than rated transactions as the frictional costs are lower and private arrangements can better suit sophisticated, large investors.

If these predictions only take into account catastrophe risk securitization transactions there is a chance that the market could grow much bigger if life, health, longevity and other forms of ILS take off. $15 billion is not that ambitious, especially considering that the market was larger than that in the recent past. These classes of risk have shown promise but have yet to gain wide adoption as risk transfer options, however the amount of risk out there which could be securitized as ILS is huge. Factor in new types of risks, such as the recent innovative lottery winnings risk transfer, and there could be a much bigger insurance-linked securities market within five years.

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