Brought to you by:

S&P tips cat bond market for further growth

The catastrophe bond market will continue to grow by 10-20% a year, driven by an increase in covered perils, broadening of event definitions and demand from governments, according to Standard & Poor’s (S&P).

“We expect to see further issuance from initiatives such as Flood Re in the UK, the African Risk Capacity [pool] in Africa and other governments such as New Zealand that see the benefits of transferring the financial risk of natural catastrophes into the capital markets,” the ratings agency says in a report.

S&P says the use of cat bond structures has grown not only among reinsurers and insurers but also government agencies in the US and elsewhere.

Besides hurricane, earthquake is one of the major risks to be transferred using cat bonds; this year the peril has been covered in the US, Japan, China, Italy, the Caribbean and Turkey.

Volcanic eruptions, meteorite impact and bushfire – outside California – are new covered perils.

So far this year “the issue amount of publicly placed cat bonds has not been as strong as last year, and there has been an increase in the use of private cat bonds and collateralised reinsurance”, S&P says.

There is $US24 billion ($32.71 billion) in cat bonds outstanding, and this year more than $US5 billion ($6.81 billion) of cat bonds have been issued, of which S&P has rated $US1.3 billion ($1.77 billion).

Aon Securities estimates overall alternative capital invested in the reinsurance market at $US66 billion ($89.94 billion) at June 30, up 12% on a year earlier.

S&P cautions any growth in the alternative market should not jeopardise strong underwriting discipline and due diligence.