Capital markets present increasing alternative to reinsurance

Two reports show that capital market instruments such as catastrophe bonds, insurance-linked securities and collateralized quota-share agreements (sidecars) are growing in popularity, but may hit a saturation point for investors.

Fitch Ratings said that these risk transfer structures represent an increasingly viable alternative to the use of traditional reinsurance. “However to the extent that hardening insurance market conditions diminish into 2013, Fitch would expect less overall utilization of capital market reinsurance alternatives than recent experience in 2011/2012,” it notes in a report.

“Convergence of the reinsurance market and capital market through cat bonds continues as 2012 is likely to have the highest total dollar amount of issuances since the prior record year of 2007,” Fitch adds.

Cat bond issuances for the past year up to June 2012 increased to $6.43 billion, a jump of more than $2 billion over the same period in 2011, Aon Benfield Securities notes in a recently released report. 

“A total of 30 transactions — including two deals from the life and health sector — closed during the period, compared with 24 transactions during the prior-year period, with U.S. hurricane risk continuing to dominate the market, accounting for more than 50% of natural catastrophe issuance,” says the report.

“In the 12-month period under review, the insurance-linked securities sector clearly demonstrated its resilience following the global financial crisis, reaching its highest levels for both new issuance and outstanding volumes in four years,” notes Aon Benfield Securities CEO Paul Schultz.