In an interview with Bloomberg TV, Paul Schultz, the Chief Executive Officer (CEO) of Aon Securities, has said that it doesn’t appear that hurricane Harvey will cause a loss to any catastrophe bonds, but that it could erode some aggregate coverage.
Despite the widespread and catastrophic flooding caused by hurricane Harvey in the state of Texas and now Louisiana, resulting in expected economic losses of $75 billion or higher, according to the latest insurance and reinsurance loss projections, catastrophe bonds are expected to avoid a loss.
Speaking to Bloomberg TV, Schultz explained that catastrophe bonds are structured to cover very extreme, low-frequency, remote events. And while Harvey is a major event, the majority of the damage is from flooding rather than wind, with the cat bond market being far more focused on the latter.
That being said, Schultz highlighted the growth of aggregate structured deals in the insurance-linked securities (ILS) market, warning that while Harvey might not signal a lost for investors in the space, it could erode some of that aggregate cover, ultimately leaving investors more vulnerable to a loss later in the year.
As noted by rating agencies, Schultz expects that losses from Harvey are more likely to be seen in the collateralised reinsurance sub-sector of the ILS space, although it remains unclear if this will be the case until final loss estimates have been produced, which is expected to take some time.
The catastrophe bond market has a focus on U.S. exposures, explained Schultz, as this is where the greatest margin is and where the most hedging is seen. To date, catastrophe bonds structured to cover flood losses are limited across the world, but as the ILS space expands its peril base, Schultz said he expects flood to be an area the ILS market will grow into.
The entry of the ILS into the U.S. flood market has been discussed numerous times, and at times like this it’s easy to see how ILS and capital market investors would likely be willing and able to help close the flood protection gap.