CEO SURVEy:
SECURITISATION
The catastrophe bond market has been growing rapidly.
Bermuda Re asked several chief executive officers
what comes next.
Since 2001, cat bonds worth more than $10 billion have been issued. In allowing investors to tailor their investment to suit a particular risk profile.
2006, a single-year record $4.9 billion in new bonds was issued; that annual More cat bond programmes are also being established that allow issuers to
number was reported to have been topped by August this year. tap into the market for smaller amounts on a more frequent basis.
The increased interest in cat bonds was initially spurred by the 2004 and Cat bonds offer issuers clear advantages, such as a lack of credit risk.
2005 Atlantic hurricane experience. A relatively low level of claims in the Their appeal to a broad range of investors ought to help make pricing more
past couple of years has made the bonds look to some investors like sure- efficient.
fire things, which, of course, they are not.
Following early scepticism, mortgage-backed securitisation has radically
Everyone is a believer, it seems. Governments, such as Mexico, the big transformed practices and roles in the US mortgage sector. Most banks no
European reinsurers, Lloyd’s, and sidecars in Bermuda and Cayman have longer assume the lending risks on mortgages, but focus instead on issuing
all issued cat bonds in the past 12 months. Investors will probably continue loans and securitising these assets to the capital markets.
to show strong interest until losses start to arise, which may temper
Wondering how the industry viewed cat bonds, we asked the following
growth, especially since most cat bonds are exhausted almost immediately
questions:
they are triggered. (The nature of the trigger is critical, but not enough
• Has the insurance risk securitisation market finally come of age?
investors, one suspects, have done their homework well enough to know
the difference.)
• What is driving the market to securitise?
When the cat bond market first developed—very slowly—in the mid-
• Is the interest in securitisation likely to change the basic business model
1990s, the majority of investors were reinsurers choosing to take on risk
for the reinsurer or the reinsurance buying process?
in a different way. But in the last few years, the profile of the market has • Which type of companies and lines of business could be most affected
changed. The majority of buyers are now hedge fund investors. by increased securitisation?
There appears to be a healthy primary and secondary market for cat • With the size and frequency of events forecast to increase, will
bonds, with the opportunity to attract an increasingly broader spectrum of securitisation help boost capacity and confidence—or might an
investors if the market continues to perform as well as it has. More flexible oversupply of securitised deals create excess capacity and therefore push
programmes are being created: many cat bonds now cover multi-peril risk, rates down?
Bermuda Re/insurance . November 2007 19
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