30 January 2014 News

More governments likely to use cat bonds

More government or state run insurance pools and organisations will turn to the use of catastrophe bonds this year as the cost of such deals gets ever closer to that of using traditional reinsurance.

That is the view of Fitch Ratings, which notes that investor demand remains considerable and the cost of sponsoring a cat bond “has continued to converge with the cost of ceding risk to the traditional reinsurance markets”.

The market has experienced a significant influx of deals from repeat sponsors such as Citizens Property Insurance (FL Citizens), Louisiana Citizens and the North Carolina JUA/IUA over the past five years. The rating agency predicts continued growth for these types of sponsors in the US, as well as internationally.

“Well-structured cat bond deals are becoming a practical solution in the higher risk portions of sponsor reinsurance programmes, which is expected to drive further issuance in 2014,” Fitch said.

“Continued US growth is expected to come from repeat sponsors looking to expand their use of the capital markets as well as from international organisations presented with increasingly innovative and viable risk transfer alternatives. The availability of potential sponsors in the US will be moderated by the limited number of state wind pools and other publicly sponsored catastrophe insurance organizations now operating.”

Three outstanding catastrophe bonds totalling $1.1 billion are due to mature in 2014, anchored by the single largest catastrophe bond in history: a $750 million issue sponsored by FL Citizens (Everglades Re - 2012), which represents a sizable portion of the company's reinsurance tower.

Fitch believes strong investor appetite means it is likely these deals will be replaced while other organisations may also turn to this method of risk transfer – both in the US and elsewhere in the world.

The rating agency describes the $400 million issuance in 2013 sponsored by the Turkish Catastrophe Insurance Pool (Bosphorus 1 Re) as a significant step for the international market. It was only the second outstanding publicly sponsored non-US catastrophe bond, following the MultiCat Mexico series sponsored by the Fund for Natural Disasters in Mexico.

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