Price competitiveness between cat bonds and reinsurance to spur the market

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The outlook for the catastrophe bond market in 2011 looks good. 2010 has finished on a particularly strong note, with issuance accelerating right up to the end of the year helping to bring 2010 cat bond issuance to around $5 billion. A number of factors should help the market maintain this momentum as we move into the new year, pricing is one of the key factors right now.

Guy Carpenter says in a report on the January renewals that insurance-linked security pipeline discussions are increasing at the moment and that this increasing conversation, along with the positive end to 2010 point to an active year ahead for the cat bond market in 2011.

At this point in time price competitiveness is one of the factors helping to increase discussion of catastrophe bonds among the re/insurer and potential issuer community at the moment. It’s also a hot topic amongst investors as they expect increasing price parity between catastrophe bonds and reinsurance to bring more investment opportunities to them.  The pricing gap between catastrophe bonds and traditional reinsurance has now narrowed to the point that they are becoming more attractive and accessible to new issuers which could help to bring new players into the market (something needed if the market is to keep expanding). We expect to see cat bond transactions from at least one new issuer in the first quarter (if our sources are correct).

Willis Re said in their recent report on the January renewals that ‘As investor demand and understanding increase, the cost gap between catastrophe bonds and traditional reinsurance has narrowed. In the face of strong investor demand, pricing margins have narrowed to a point where the product is competitive in pure pricing terms as compared to traditional reinsurance, not only for U.S. hurricane risk but increasingly for other perils as well. These price drops have occurred, notwithstanding the recent and pending catastrophe model changes that affect catastrophe bond pricing more rapidly than traditional reinsurance renewals.’

Other factors that we believe will help spur the market into 2011 are diversity of perils (with some new perils issued in the 4th quarter 2010 it’s likely that other issuers will seek to take advantage of investor acceptance of new risk classes) and investor demand (we expect strong investment in the market during 2011 and as we all know issuances will occur to provide investment capacity).

What factors do you think will help make or break the market during 2011?

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