$12.5bn cat bonds exposed to Irma with event set to test market: AM Best

Analysis from AM Best shows that approximately $12.5bn of catastrophe bonds are exposed to Hurricane Irma, with losses from the disaster set to test investors’ future appetite for such risk. The firm also said that if insured losses from Hurricane Irma top $75bn they would alter pricing in the Florida property catastrophe reinsurance market, but initial estimates from modelling firms suggest a more modest impact. According to AM Best, outstanding catastrophe bonds amounted to approximately $24.7bn as of 30 June 2017. About $12.5bn of this covers US-named storm or wind peril in Florida. The ratings agency’s numbers reveal that there are 29 tranches of outstanding catastrophe bonds sponsored by Florida-domiciled insurers and Florida-only subsidiaries of major writers, with a total value of approximately $2.5bn at the mid-point of this year. Another 33 catastrophe bonds with US wind-related perils or US-named storms as part of the perils cover, sponsored by reinsurers and national writers, comprise the remaining $10bn of Florida exposures. AM Best said that recent growth in alternative capacity has contributed to an abundance of reinsurance capacity during the past five years, but an active hurricane season could affect investors’ future appetite for this segment. It believes losses from Hurricane Irma could help to change the behaviour of traditional reinsurers and the use of alternative capital instruments. “One potential impact that might emerge is a change in behaviour of traditional reinsurers and the use of alternative capital instruments, including catastrophe bonds, collateralised reinsurance programmes, sidecar vehicles and insurance-linked securities funds,” said Asha Attoh-Okine, associate director at AM Best. In most instances, an insurer must first reach their own retention level and exhaust protection from private reinsurers and the Florida Hurricane Catastrophe Fund to the attachment level associated with each catastrophe bond, for catastrophe bonds to trigger in Florida. If “extensive” insured losses result from Hurricane Irma, AM Best believes the risk transfer industry will be faced with a number of questions that could alter the catastrophe bond landscape: Will convergence capital contract? Will insurance-linked securities fund managers continue their active participation in the primary insurance market? What impact might this event have on catastrophe bond spreads and the secondary market for catastrophe bonds? AM Best also said that if insured losses from Hurricane Irma exceed $75bn they would alter the pricing dynamics in the Florida property catastrophe reinsurance market. However, initial estimates from modellers suggest that Hurricane Irma will result in more modest insured losses. Risk management lessons learnt from Hurricane Andrew in the 1990s may help reduce both insured and total losses from Irma, continued the ratings agency. “The lessons learned after Hurricane Andrew in the 1990s – among them, better building codes and more effective evacuation planning and other loss prevention and mitigation techniques – may lower insured and non-insured losses despite increases in Florida’s population and total insured values during the past decade, which amounted to approximately $2.2trn for policies with wind coverage,” said AM Best.

$12.5bn cat bonds exposed to Irma with event set to test market: AM Best

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