CAT Bonds Grow Slowly As Reinsurance Competition

By Michael Ha

NU Online News Service, April 27, 12:17 p.m.EDT?A record $1.73 billion in catastrophe bonds wereissued last year, but despite strong growth, the market representsa very small portion of worldwide CAT reinsurance coverage,according to a report.[@@]

The study by Guy Carpenter, a New York-based reinsurancebrokerage unit of Marsh & McLennan Companies, found CAT bondsissued in 2003 increased 42 percent compared with $1.22 billion in2002. In some cases, the firm said, CAT bonds are competitive withtraditional reinsurance.

Guy Carpenter described the CAT bond market as the most commontransaction type for risk-linked securities that are used byinsurers and reinsurers, and sometimes by non-insurance companies,to transfer risks, complementing or even becoming an alternative tothe traditional reinsurance arrangement.

The brokerage report said the CAT bond market has been showing asteady growth in the last few years. For 2003, eight transactionswere completed overall, with three coming from first-time issuers.Since 1997, Guy Carpenter said, 54 CAT bond issues have beencompleted for total risk limits of some $8 billion.

Last year, there were five separate issuers, with SwissReinsurance accounting for three separate transactions. Swiss Re,with Central Reinsurance Corporation from Taiwan, constituted the2003's reinsurer sponsors. One transaction came from a corporatesponsor, while two originated from insurance carriers.

The Guy Carpenter report also pointed to a continuing trend forlarger transactions, with the average issue size reaching a newhigh of $217 million in 2003, up from $174 million in 2002.

One notable issuance last year was Central ReinsuranceCorporation's sponsoring of the Formosa Re Ltd. issuance, the firstCAT bond issued for Taiwanese earthquake risk. The year 2003 alsohad the largest transaction to date, from the three-trancheZenkoryen Phoenix issue of $470 million.

Looking at perils and geographies, the CAT bond market isdominated by U.S. East Coast hurricane, California earthquake,European winter storm and Japanese earthquake as mostsecuritized.

The Guy Carpenter report also noted that CAT bond costs havegenerally trended downward during the past year. In certaininstances, the report said, "this has meant that catastrophe bondswere competitive in cost with traditional reinsurance."

Commenting on the report, Standard & Poor's Ratings Servicesdirector James Doona said the CAT bond market is "an attractivealternative" to traditional reinsurance for issuers.

"What I've seen happen," Mr. Doona told NationalUnderwriter, "is a move toward a more systematic program, andnot issuer-specific, and more like a self-registration of notes.The cost has come down. And by doing it as a program, the cost hascome down even further."

But still there are plenty of hurdles for CAT bond issuers, Mr.Doona added. He noted that in comparison, the standard reinsurancemarket is an established market, and "when you do reinsurance, theguy on the other side knows you already and essentially you justmake a phone call." But with CAT bonds, the issuer still has toeducate the party on the other side about the bond issuance.

What the CAT bond market has going for it is that there is atremendous amount of capital. "But I don't know if CAT bonds willever be easy on the issuer as the standard, traditionalreinsurance," he observed.

Mr. Doona also commented that many insurers have been looking atCAT bonds but are doing it in "a small, research mode."

"They are not relying on it, but they want to know how to do itjust in case capacity dries up or the reinsurance rates go throughthe roof," Mr. Doona said. He observed that the CAT bond marketstill represents a low-single-digit percentage in the worldwide CATreinsurance coverage.