Betting on Cat Bonds

Morgan O'Rourke


September 1, 2010

Despite continued reports of an active Atlantic hurricane season, seven of the eight catastrophe bond transactions completed in the second quarter of 2010 included exposure to U.S. hurricane losses, according to Guy Carpenter & Company and GC Securities. The data does not point to a lack of faith in hurricane prediction, but rather to the increased interest in catastrophe bonds as a method of risk transfer. With eight catastrophe bond transactions (the one non-wind storm-based bond was for exposure to New Madrid earthquake risk in the Midwest), totaling more than $2 billion in risk capital, the second quarter of 2010 was the second-most active quarter on record.

Despite the surge in activity, however, the report revealed that total risk capital in the second quarter fell to $11.8 billion, which is a drop of slightly less than 1% from the first quarter of 2010 and 5.5% from the end of 2009. Some analysts have theorized that the rise in transactions and the corresponding drop in capital invested indicate that the cat bond market lacks enough options for the diversification of risk.

The report anticipates a drop in appetite for U.S. hurricane exposure but indicates that investors still have a strong interest in U.S. earthquake, European wind, and Japanese wind and earthquake perils. 

Morgan O’Rourke is editor in chief of Risk Management and director of publications for the Risk & Insurance Management Society, Inc. (RIMS)