Willis WCMA Reports Sandy’s Cat Bond Impact Likely to be Muted

November 14, 2012

The impact of Hurricane Sandy on the catastrophe bond market is likely to be muted based on current estimates, with little impact on new pricing, according to Willis Capital Markets & Advisory (WCMA), part of global insurance broker, Willis Group Holdings.

Willis said the “scope and scale of the storm makes it unlikely that any bonds will be triggered solely by Sandy; however if losses mount and early estimates prove wrong, some bonds could be at risk. Some commentators believe that the significant business interruption and demand surge / loss amplification component to the event could trigger greater losses than those currently estimated.”

The latest Insurance-Linked Securities (ILS) Market Update from WCMA, “Spreads Continue to Tighten as Sandy Impact Is Assessed” reports that” there were three new catastrophe bonds issued in the third quarter of 2012 totaling $525 million, down slightly from four transactions totaling $676 million in the same period a year earlier. Total non-life issuance for the first three quarters of 2012 to date is now $4 billion, up from $2.3 billion for the first three quarters of 2011.”

Bill Dubinsky, Head of ILS at WCMA, commented: “The third quarter is typically a quiet period for new catastrophe bond issuance and 2012 was no exception. But in the short-term, the market outlook is very positive. Spreads have tightened in the primary and secondary markets since the late second quarter and there has been strong investor demand and successful execution at the lower end of pricing guidance. Our forecast for total 2012 issuance remains in the $5.5 billion to $6 billion range.

“Based on initial loss estimates from modeling firms, we believe that Hurricane Sandy will have little if any impact on new issue pricing in the catastrophe bond market, especially outside the U.S. Of course, if losses mount and early estimates prove wrong, some bonds could be at risk.

“Over time we expect the catastrophe bond market will expand to encompass more risks and shift towards a greater acceptance of indemnity triggered structures. However, we expect more rapid growth will continue to be observed in simpler, private collateralized reinsurance transactions.”

Willis’ quarterly report also features an interview with Dan Hogan, Vice President in The Hartford’s Enterprise Risk Management department. Analyzing the attractions and potential of the ILS market, he noted two attributes that make it especially attractive to sponsors: “It provides fully collateralized cover, which is especially valuable when purchasing protection for large industry loss events, and offers multiyear protection, which allows sponsors to better manage the risk of post-event disruptions in reinsurance market capacity and pricing.

“I think it would be a positive development for the ILS market if it could expand to cover additional perils; wind and earthquake covers obviously dominate the market today,” he added.

According to the report, “catastrophe bond issuance in the final quarter of 2012 is expected to be strong. For the past two years, fourth quarter issuance has been approximately $2 billion.”

Source: Willis Group Holdings plc

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