RMS Forecasts Increased Growth for Insurance Linked Securities in 2010

January 7, 2010

A bulletin from Risk Management Solutions notes that the fourth quarter of 2009 was the “most active… ever for catastrophe bond issuance, reaching almost $1.1 billion in total volume, eclipsing the previous best fourth quarter by over 75 percent.” RMS also said it had “conducted the expert risk analysis for as much as 70 percent of these bonds.”

RMS explained that, although “the second quarter of the year has traditionally been the most active as companies seek coverage before the start of the hurricane season, favorable pricing in the second half of 2009 led more companies to choose insurance-linked securities (ILS) as an alternative to reinsurance before the January 1 renewals.”

Robert Stone, director with the RMS dedicated ILS team, RiskMarkets, observed: “We have seen growing appetite for catastrophe bonds as spreads have returned to pre-credit crunch levels and the cost of issuing has dropped by 30 to 40 percent over the last six months,” said. “More companies have put their toes back in the water after a slow start in 2009 and we have been engaged to provide expert risk analysis for a broad variety of deals including new and innovative transactions.”

RMS also pointed out that the first “excess mortality securitization structured using a probabilistic catastrophe model,” was placed in 2009. It covered the H1N1 flu pandemic. “Interest in parametric deals also continues to increase as the RMS Paradex index was also used to structure Atlas VI Capital Ltd and provide SCOR with coverage against losses from Europe windstorm and Japan earthquake,” the bulletin added.

Activity in the ILS sector “looks set to remain high in 2010 as a record volume of catastrophe bonds is due to mature,” RMS continued. Many of these were issued in 2007, which RMS said has been “the most active year ever for ILS to date. Of approximately $5 billion of bonds due to expire, between 50 to 80 percent are yet to be renewed.”

“With favorable pricing and ILS attracting the attention of a growing number of investors, market conditions are ripe for companies to reissue and replace the expiring bonds,” commented Peter Nakada, managing director of RiskMarkets at RMS.

Source: Risk Management Solutions – www.rms.com

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