Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Further insurance-linked securities market diversification expected in 2011


Standard & Poor’s (S&P) have published a report titled ‘Global Insurance-Linked Securitization Market Likely To Diversify Further In 2011‘. The report, available to subscribers of their RatingsDirect service, gives some insight into how they see the insurance-linked security markets prospects for development during 2011. Standard & Poor’s are responsible for rating the vast majority of catastrophe bonds and insurance-linked securitization transactions and as such have a unique insight compared to issuers and organisations assisting in issuance of deals.

S&P say that they expect insurance-linked securities issuance to increase during 2011 but they do not expect a significant jump. This is similar to most other predictions who project issuance of $5 billion to $6 billion for 2011. During 2010 S&P rated $4.3 billion of natural peril and life/health related catastrophe bonds which was an increase of $1 billion over 2009 levels. Over the whole ILS market S&P say they rated 80% of issuance by amount in 2010.

S&P are positive about the range of deals issued and risks covered by insurance-linked securities during 2010 and they call for that diversification of issuance to continue. We echo this sentiment, the more diversification that can be encouraged the better as it will serve to increase confidence in the market. This can help to spur issuance, particularly among new entrants to the market who may see an opportunity to hedge risks they once thought not possible through ILS, satisfy investors demand for non-correlated and diversified investment opportunities and also help to attract further investment interest in the market from new sources.

Cameron Heath, a credit analyst at Standard & Poor’s said, “We have long argued that a more-diverse product offering in the ILS space would appeal to a wider base of investors. In 2010, the ILS market saw new sponsors, new trigger mechanisms, and new perils, appealing to investors’ desire for diversification now and in the future.”

Mr. Heath continued: “In the short term, we believe most of the $3.75 billion of notes we have rated that are maturing this year will be renewed. However, we do not expect a significant jump in ILS issuance, despite increased investor demand, because of a soft reinsurance market, coupled with a lack of catastrophe events that have caused losses to the outstanding cat bonds.”

It’s encouraging to hear that they expect most of the maturing ILS deals will be renewed. It’s vital to get a constant flow of capital maturing and then being re-issued as this will help to keep investors interest in the sector high. S&P’s outlook is very much aligned with other market participants for another successful year for the market. Despite the slow start, with only a single deal from Swiss Re being marketed right now, it looks positive for issuance to pick up as we head through Q1 and into Q2.

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