Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

How secondary cat bond trading volumes react to disasters


Just last week we published an interesting graph which shows how the approaching hurricane Irene affected the price of exposed secondary market catastrophe bonds. Pricing fluctuations in the face of disaster is just one of the effects that the secondary market experiences as a disaster approaches or in the aftermath, the other effect is fluctuations in the volume of cat bonds traded.

This interesting graph below comes from a presentation given at a media day held by Swiss Re yesterday. It shows the monthly cat bond secondary trading volume undertaken by Swiss Re Capital Markets during 2011 and shows that the market demonstrates strong liquidity both during and after major events. Swiss Re themselves traded $800m during 2011 and they estimate that approximately 15%-20% of the outstanding volume traded in the secondary market.

Swiss Re Capital Markets Monthly Secondary Cat Bond Trading Volume

Swiss Re Capital Markets Monthly Secondary Cat Bond Trading Volume

This liquidity before, during and after live catastrophe events is essential to allow risk to change hands, portfolios to be balanced and even speculators to come into the market attempting to make a profit. These are all signs of a mature and liquid secondary market.

We suspect that the reason for high volumes being traded in November will have been a combination of the end of the U.S. hurricane season combined with rising issuance meaning investors were keen to re-balance their portfolios to accommodate new risk.

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