Swiss Re Insurance-Linked Fund Management

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Catastrophe bond risk capital outstanding could grow to $16 billion by end of 2012


Not only was April a record-breaking month in terms of the amount of risk capital issued in catastrophe bond transaction, as we wrote the other day, it also saw the amount of cat bond and ILS risk capital outstanding rise to $14.7 billion according to Swiss insurance-linked securities investment manager Plenum Investments. When Artemis last reported on the amount of risk capital outstanding in the market we had the number at $14.2 billion at the end of March thanks to data from Aon Benfield.

As well as strong issuance in April of $1.245 billion there were also maturities to take into account, including two series of Blue Fin Ltd. cat bond notes from Allianz which between them totalled around $470m. We expect the overall amount of risk capital outstanding to grow further by the end of this quarter.

Plenum Investments says that the market has grown by $1.6 billion between 31st March 2011 and 31st March 2012. They explain that the cat bond market is growing and will continue to grow because:

  1. The market is catching up with last year’s low issuance volume,
  2. Certain reinsurance markets offer better affordability for transferring risks in the form of CAT bonds,
  3. New sponsors are willing to use fully collateralized risk transfer solutions,
  4. New diversifying risks are being brought to the CAT bond market.

Plenum projects that the amount of risk capital outstanding in the cat bond and ILS market could reach as much as $16 billion (according to their measures) at the end of 2012. We agree with them and believe this is perfectly feasible if the market achieves around $6 billion of issuance in 2012 as many expect it will.

Looking ahead to 2013 and beyond Plenum Investments believe that the Solvency II regulatory environment, which is due to come into effect in January 2014, will lead to an increase in cat bond issuances as insurers seek out increased coverage to help offset
Solvency II’s risk based capital requirements. Plenum see this as a positive development for the cat bond market which will help to increase liquidity and diversification making it more efficient to manage cat bond and ILS portfolios.

It’s worth noting that most reports on the size of the cat bond market will differ as each company includes different types of deals and risks. For example Willis’ recent report was for cat bonds only and so quoted a lower figure for risk capital outstanding, where as Plenum and Aon Benfield also include mortality, longevity and health insurance ILS deals.

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