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Catastrophe bonds ride out the credit crunch storm (so far)


Standard & Poor’s have issued a report on the market for natural catastrophe bonds and how it has faired under the current economic gloom and credit crunch. The report ‘Nat Cat Insurance Bonds Buck The Credit Crunch Trend’ (available to Ratings Direct subscribers) concludes that catastrophe insurance linked securities and catastrophe bonds have proven generally resilient and issuance has seemed mostly immune from the effects felt by other capital markets.

Investor motivation is one of the reasons, the report says “One of the key attractions of many ILS deals is the limited/lack of correlation to traditional investments, owing to the performance trigger being driven by more remote and non-financial risks such as natural perils or demographic trends. Indeed, and perhaps not surprisingly, they appear more correlated to the actual natural catastrophe experience and underlying reinsurance pricing.”

On the future for the market S&P says “Looking forward, we expect that the fundamentals driving risk pricing in ILS in general and nat cat bonds in particular will continue to protect this asset class from the worst of the disruptions being felt elsewhere in the traditional credit markets.”

So far so good then for the cat bond market. While issuance hasn’t been record breaking this year, they are likely to remain an attractive alternative for investors as long as there aren’t any losses to exisiting bonds. Keep an eye on Gustav and the Atlantic basin if you’re at all risk averse!

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Artemis London 2022 - Insurance-linked securities conference in London

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