Growth potential huge for insurance-linked securities

The total volume of Insurance-linked Securities (ILS) outstanding has grown three-fold over the last five years, and is now close to US$23 billion, according to Swiss Re’s new sigma study “Securitization.”
Life bonds account for two-thirds (or US$15 billion) of the total volume, whereas non-life bonds make up the remaining volume (US$8 billion).
ILS provide insurers with a financing vehicle and a means to transfer risks to the capital market. “IInsurers and investors increasingly benefit from these new opportunities,” Swiss Re notes in its study. “Since total bonds outstanding are still just a small fraction of the potential market, issuance is likely to see strong growth going forward.”
Swiss Re notes the transfer of non-life risks to the capital markets represented only 6% of global property and casualty catastrophe reinsurance cover in 2006. The market for cat bonds is still nascent, the study notes, and the cat bond market is expected to grow to US$3044 billion by 2016.
Most catastrophe or “cat” bonds transfer property and casualty insurers’ peak risks from wind and earthquake to the capital markets. They complement and in some cases substitute for other risk and capital management tools.
“Cat bonds represent about 85% of the current outstanding volume of non-life bonds,” Swiss Re notes. “The remaining 15% is split between liability, credit, auto, and other miscellaneous risks.”