General Insurance Article - Catastrophe bond market unlikely to be impacted by Sandy


 The impact of Hurricane Sandy on the catastrophe bond market is likely to be muted based on current estimates, with little impact on new pricing, according to Willis Capital Markets & Advisory (WCMA). The scope and scale of the storm makes it unlikely that any bonds will be triggered solely by Sandy; however if losses mount and early estimates prove wrong, some bonds could be at risk.

 Some commentators believe that the significant business interruption and demand surge/loss amplification component to the event could trigger greater losses than those currently estimated.

 The latest Insurance-Linked Securities (ILS) Market Update from WCMA, ‘Spreads Continue to Tighten as Sandy Impact Is Assessed’ reports that there were three new catastrophe bonds issued in the third quarter of 2012 totalling $525m, down slightly from four transactions totalling $676m in the same period a year earlier. Total non-life issuance for the first three quarters of 2012 to date is now $4bn, up from $2.3bn for the first three quarters of 2011.

 Commenting on the outlook for the market, Bill Dubinsky, head of ILS at WCMA, said “The third quarter is typically a quiet period for new catastrophe bond issuance and 2012 was no exception. But in the short-term, the market outlook is very positive. Spreads have tightened in the primary and secondary markets since the late second quarter and there has been strong investor demand and successful execution at the lower end of pricing guidance. Our forecast for total 2012 issuance remains in the $5.5 to $6bn range.

 Based on initial loss estimates from modelling firms, we believe that Hurricane Sandy will have little if any impact on new issue pricing in the catastrophe bond market, especially outside the US Of course, if losses mount and early estimates prove wrong, some bonds could be at risk.

 Over time we expect the catastrophe bond market will expand to encompass more risks and shift towards a greater acceptance of indemnity triggered structures. However, we expect more rapid growth will continue to be observed in simpler, private collateralized reinsurance transactions.” 

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