Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

The fluctuating mix of perils making up the catastrophe bond market


It’s interesting to take a closer look at the mix of perils that make up the catastrophe bond market and to compare the way that mix changes over time. In recent years the dominance of the cat bond market by U.S. hurricane risks has been a defining feature and that likely won’t change as the cat bond market is the perfect place for peak perils to be transferred through. After a brisk Q1 of issuance the mix has changed slightly since the end of 2011, as evidenced by these charts from Willis Capital Markets & Advisory (WCMA).

Willis Capital Markets & Advisory recently published their end of Q1 2012 ILS and cat bond market report (which you can read all about and download a copy of here). The report contained a pie-chart showing the mix of perils making up the market at the end of March. We also wrote back in February about the Q4 2011 report from WCMA at which time the mix of the market was subtly different so we thought it worth repeating that chart here allowing you to compare the two to see what changes Q1 cat bond deals made to the overall mix of perils in the market.

At the end of Q4 2011 the mix of perils looked like this first pie-chart below:

On-Risk Catastrophe Bond Capacity by Peril % (Dec 31, 2011)

On-Risk Catastrophe Bond Capacity by Peril % (Dec 31, 2011)

By the end of Q1 2012 the mix of perils had changed to those displayed in this pie-chart:

On-Risk Catastrophe Bond Capacity by Peril % (Mar 31, 2012)

On-Risk Catastrophe Bond Capacity by Peril % (Mar 31, 2012)

So, what’s different. Well the number that jumps out the most is that the percentage of the market made up by pure U.S. wind cat bonds has dropped from 20% at the end of Q4 2011 to 17% at the end of Q1 2012. Of course if we had an up to date version of this chart that would likely be higher again thanks to the recent $750m Everglades Re Ltd. deal.

There have been other subtle changes such as Japanese perils being included as a segment at 6% thanks to the $300m Kibou Ltd. Japan quake cat bond and U.S. wind & quake bonds dropping by 1%.

Overall the market had grown by $600m according to WCMA’s transaction database but the amount of cat bond capacity exposed to U.S. hurricanes has actually decreased from 68% at the end of Q4 2011 to 67% at the end of Q1 2012. This reflects the balanced mix of perils issued through the record first quarter.

It will be interesting to see how this chart changes again at the end of Q2, given recent issuance it looks like the exposure to U.S. wind will have risen again.

If you want to get into the detail you can see exactly what perils were issued in every cat bond in our Deal Directory.

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