Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

‘We could see a wave of catastrophe bond issuance’


The title of this post is taken from ratings agency Moody’s article regarding the CEA’s recent directly issued catastrophe bond, more on that Moody’s article in our piece published earlier today. Moody’s are suggesting that the conditions are right for a large uptick in the volume of catastrophe bond issuance, particularly if there is another major catastrophe loss.

Investors have ‘pent-up demand’ for cat bonds says Moody’s, particularly for those that help them diversify their insurance-linked securities portfolios away from U.S. hurricane risk which dominates the outstanding cat bond market at the moment. As maturities continue to outpace new cat bond issuances that investor demand is currently not being satisfied.

The current financial crisis, now dominated by the new of the downgrade of the U.S. AAA rating, could be stoking that demand for cat bonds even further as investors look for safe harbour for their funds. An asset with low correlation to the wider financial markets is going to grow in demand over coming weeks as investors research new opportunities to safeguard their investments. The ILS markets should be prepared to take advantage of any increase in demand and we have heard of more private cat bond deals in the pipeline which aim to take advantage of investor interest.

High investor demand needs to be regarded as an opportunity by the cat bond market. An opportunity to issue new deals that have been on the back burner prior to hurricane season and an opportunity to attempt to issue new types of risk in cat bond form (something that could be extremely well received right now). Conditions are right for the cat bond market to return to growth at some point in the next year, we expect issuance to accelerate as hurricane season comes to a close.

Here’s that quote from Moody’s in full:

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‘Given investor demand, we could see a wave of catastrophe bond issuance in the wake of another major catastrophe and capacity shortages in the reinsurance market, which we expect to temper reinsurers’ ability to raise prices’.

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