Tokio cat bond will encourage Japanese issuers
The recently closed $245 million catastrophe bond issued by Tokio Marine & Nichido Fire Insurance could prompt other big Japanese insurers to also tap the insurance linked securities (ILS) markets as an alternative means of risk transfer.
That is the view of rating agency Moody’s which believes other insurers, such as Mitsui Sumitomo Insurance and Sompo Japan Insurance, could be encouraged now to diversify their risk transfer tools for their own earthquake exposures.
“Although insurers already use traditional reinsurance to reduce underwriting risk, rising prices after the March 2011 earthquake, particularly for placing commercial/industrial earthquake risk, has led to rising hesitancy to underwrite related policies. For investors, cat bonds’ relatively higher yields than Japanese government bonds or corporate bonds and lack of correlation with market risks are appealing. We expect more insurers to follow Tokio Marine’s lead and issue their own cat bonds,” the report said.
Kizuna Re II was Tokio’s second cat bond since the March 2011 earthquake, but the first for a private insurer using an indemnity trigger.
“One protective feature of the bond is that its pay-out is linked directly to actual loss experience (indemnity) instead of the common practice of using proxy triggers like a parametric index or market index. This helps shield Tokio Marine from basis risk whereby a non-indemnity catastrophe bond’s trigger does not fully match actual loss,” Moody’s said.
