Catastrophe bond sales this year totaled $4.4 billion with the announcement today that Munich Re has issued a $190 million California earthquake bond, an investment bank reported.
Bank of America Equity Research said the total is up from about $2 billion in cat bonds issued in 2005, citing data from the reinsurance broker Benfield Group.
It said the Munich Re-sponsored cat bond–issued by Cayman Islands-based Lakeside Re Ltd.–will cover losses to Zurich American Insurance Company in the event of a California earthquake.
Bank of America analysts said that despite the cat bond sale levels, they believe that reinsurance buyers continue to prefer traditional reinsurance with triggers pegged to company-specific losses over alternative forms of reinsurance.
Alternative reinsurance, they said, frequently are pegged to industry losses and carry significant basis risk for buyers. The bank analysts said they believe the surge in issuance of alternative forms of reinsurance is more like filling a gap left by reinsurers than competing directly with them.
The sharp increase in reinsurance capacity from catastrophe bonds and other nontraditional forms of reinsurance, such as sidecars and industry loss warranties, “is a response to what we believe is an approximate $50 billion shortfall in capacity to write peak-zone catastrophe insurance,” the equity analysts said.
The shortfall, according to Bank of America's analysis, is the result of:
o The 2005 hurricane losses.
o Increases to modeled loss forecasts.
o Stiffened rating agency capital requirements.
o Unwillingness on the part of property insurers and reinsurers to expose a significant part of their capital bases to catastrophic losses in any one zone.
A shortfall in capacity to write property and property-catastrophe insurance, and the steep premium rate increases that have resulted, most directly benefits those companies for which property insurance makes up a significant portion of their books of business, Bank of America said.
The firm's analysts' coverage of companies includes Axis Capital, Aspen Insurance Holdings and Everest Re.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.