Cat bond market reaches tipping point, panel says

Insurance and banking specialists believe the catastrophe bond market has reached a tipping point, according to data presented at an event hosted by BNY Mellon.

Key reasons include the actual size of the market, which is now pushing prices to attractive levels; the ability to tap into a yield that looks attractive against so-called risk free assets; and the increasing realisation that Cat bonds can offer diversification within portfolios.

According to data from Aon Benfield Securities, issuance of Cat bonds hit some $3.3bn in the second quarter of 2013 alone. While BNY Mellon presented data suggesting 78 of its top 100 life insurance clients and 34 of its 50 top non-life insurers are looking to the asset class. The nominal size of Cat bond deals administered by BNY Mellon increased 20% from 2011 to 2013, the bank added.

The rate of increase in the size of the Cat bond market is an important driver. The bonds did not even exist before the mid-1990s, when they were created in the aftermath of Hurrican Andrew and the Northridge Earthquake in the US. The idea behind the bonds is to transfer specific risk from a sponsor to an investor via capital markets. Sponsors include names such as Munich Re, Assurant, USAA, Travelers and Allstate.

The level of Cat bonds outstanding is approaching $20bn the data suggests, with BNY Mellon expecting this to double in the next five years, and double again within possibly a shorter time period.

Among those presenting views at BNY Mellon’s event were Luca Albertini, chief executive officer at Leadenhall Capital Partners, which specialises in life and non-life insurance linked contracts; Michiel Bakker, European head of Willis Capital Markets & Advisory Unit; Alex Plenty, associate partner at Business Analytics and Optimisation, IBM Global Business Services, UK and Ireland; and Paul Traynor, head of Insurance Segment at BNY Mellon.

The interest of a technology company such as IBM comes from another of the drivers of the market: big data.

Those involved in the Cat bond market use increasingly sophisticated technology to speed up analysis of the risk involved in certain exposures. This helps improve the analysis required.


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