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High Cat Bond Issuance Highlights Their Growing Importance

No longer are catastrophe bonds a specialized niche market; they've become a standard part of the risk transfer strategies of many insurers and reinsurers. This year's issuance statistics convincingly reflect that trend. According to Verisk's Property Claim Services (PCS), issuance of cat bonds reached $3.6 billion in the first half of 2012. (That's double the amount from the same period last year.) And the total issuance through September 2012 stands at $4.1 billion, according to the PCS Third-Quarter Catastrophe Bond Report: The Calm before the Fourth-Quarter Storm, exceeding total issuance for 2011 as a whole.

  9 Months
9 Months
PCS trigger use ($ billions) 1.7 1.2
PCS trigger use (number of transactions) 10 7
Total issuance ($ billions) 4.1 2.9
Total issuance (number of transactions) 19 16

Sources: PCS, Artemis Deal Directory

Meanwhile, all signs point to more growth in the cat bond market, continuing a trend that goes back to 2008, when the market's previous run of uninterrupted growth stalled, according to Guy Carpenter.

The high activity in the cat bond space this year (and in recent years) relates in part to the fact that the securities provide full collateralization of the underlying risk transfer. That's become increasingly important since the 2008 financial crisis, when insurers and reinsurers started looking more closely at counterparty risk and market security. The bonds also offer multiyear protection, which can result in a lower cost of capital in years with heavy catastrophe losses (such as 2010 and 2011).

Such benefits mean that companies no longer turn to the capital markets only when reinsurance rates harden. The success of the ILS (insurance-linked-securities) market has created true believers— companies that have made the instruments an essential part of their risk and capital management processes.

Bond sponsors continue to embrace the use of catastrophe modeling to model the risk profile of their transactions. So far in 2012, sponsors have used AIR Worldwide catastrophe models in 100 percent of the public transactions exposed to property risk. (AIR models the risk from natural catastrophes and terrorism in more than 90 countries). And over the past 15 years, sponsors and investors have come to accept a wide range of triggers that address specific business needs, including the PCS Catastrophe Loss Index.

Catastrophe bonds have become important because they are useful to both investors and sponsors. Now that insurers and reinsurers can structure a bond quickly — or carefully customize it to fit the sponsor's own risk profile — the securities have a vital place in the industry's risk and capital management.

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