Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Catastrophe bond market still largely dominated by U.S. hurricane risk


At the end of 2011 the catastrophe bond market continues to be dominated by exposure to U.S. hurricane risks. It’s a trend that has been increasing since 2007 as more deals focused on U.S. wind as a peril and was particularly exacerbated by the slow downs in issuance after the financial crisis which saw repeat issuers continue their regular U.S. wind cat bonds while diversifying opportunities slowed.

An interesting graph from Swiss Re shows that while U.S. hurricane risk is still dominant the cat bond market could be on the cusp of becoming more balanced. Swiss Re shared this graph during their recent insurance-linked securities media day and it shows the mix of perils within cat bonds tracked as part of their Swiss Re Global Cat Bond Performance Index.

While the market, and their index, is clearly still U.S. wind top-heavy, it looks like U.S. earthquake risks are climbing as a percentage of the index and also European windstorm risk seems to be on an upward turn during 2011. Japanese perils have clearly been in decline and it remains to be seen whether cat bonds can be reasonably priced to encourage sponsors to return to issue these risks in the cat bond market after Tohoku (given reinsurance and retro pricing in Japan it seems likely that cat bonds could be price competitive).

For the market to become more diverse it would be nice to see a fifth series of data in this graph as a growing rest of world series of perils are issued as cat bonds. That would be well received by both sponsors seeking to enter the market in other geographic locations and investors looking for new ways to diversify their investment portfolio.

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Swiss Re Global Cat Bond Performance Index Index Exposure by Peril

Swiss Re Global Cat Bond Performance Index: Index Exposure by Peril

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