The convergence market has provided an opportunity for entities that act as insurers of last resort to transfer some of their peak exposures to the capital markets, according to a Best’s Special Report titled, “Last Resort Insurers Welcome Relief From Growing Catastrophe Bond Market.”
These entities – including but not limited to fair access to insurance requirements plans, beach/windstorm plans and quasi state-run insurance companies – welcome the availability of insurance-linked instruments such as catastrophe bonds, industry-loss warranties and insurance-linked funds, as exposures continue to grow via increased property values. This growth has occurred despite depopulation of property policies by some of these entities and the private insurance/reinsurance market’s cautious approach in accepting wind exposures from high-risk areas.
Like other primary insurance companies with peak exposures, these entities are able to compare the cost of traditional reinsurance coverage with the use of insurance-linked instruments for transferring some of their peak risk. This added benefit may reduce their cost of reinsurance.
Approximately USD$5.6 billion of catastrophe bonds have been issued by seven of these entities from 2009 through Sept. 30, 2014. The two main perils are hurricanes and earthquakes occurring in their respective regions. Hurricanes accounted for approximately USD$4.53 billion, or 81.2 percent, with earthquakes taking the other USD$1.05 billion, or 18.8 percent, for these entities during the period reviewed by A.M. Best.
Source: A.M. Best Company
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