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Cat Bond Issues Expand As Reinsurance Premiums Surge

Source: Nikkei

Posted on 26 Mar 2012

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Global issuance of catastrophe bonds is continuing to grow, with new offerings expected to surpass 5 billion dollars in 2012, an increase of 16% on the year.

So-called cat bonds -- issued by insurers as a means to reduce payment risk in times of disasters -- have been on an uptrend since 2008, according to Germany's Munich Re and others. Driving offerings is the soaring cost of reinsurance following a slew of major catastrophes, including the Great East Japan Earthquake, flooding in Thailand and hurricanes in the U.S.

Casualty insurers use reinsurance to minimize insurance payout risk, but reinsurance premiums have skyrocketed due to a host of big calamities. Such premiums paid by casualty insurers across the globe hit 146.8 billion dollars in 2010 and swelled further last year. Japanese reinsurance premiums, which will be revised in April, are expected to spike some 30% next fiscal year.

As reinsurance premiums climb, casualty insurers "are switching to cat bonds as an alternative way to mitigate risk," says an official at a top reinsurer.

In Japan, the National Mutual Insurance Federation of Agricultural Co-operatives issued 300 million dollars of cat bonds in February for covering domestic earthquakes. The bonds have a yield of roughly 5% and mature in February 2015. The federation teamed up with major reinsurer Hannover Re for the offering.

Overseas institutional investors are the main buyers of cat bonds. The risks are huge, but so too are returns. Therefore, hedge funds and institutional investors often include them in their portfolios. Japanese firms account for just 5% of total cat bond issuance worldwide.