Insurance linked security market rides out credit crisis storm

Natural catastrophe (nat cat) bonds, currently the main insurance-linked securities (ILS) asset class, have proven generally resilient during the capital market’s turbulence over the past year, with the acid test being the current credit crunch, reports Standard & Poor’s.
The pricing of nat cats, particularly since the credit market disruptions that began in mid-2007, shows how comparatively immune issuance has been from difficulties experienced in other markets, S&P’s says in its latest RatingsDirect report, ‘Nat Cat Insurance Bonds Buck the Credit Crunch Trend.’
Investor motivation is one reason, S&P’s suggests. “One of the key attractions of many ILS deals is the limited/lack of correlation to traditional investments, owing to the performance trigger being driven by more remote and non-financial risks such as natural perils or demographic trends,” the report says.
The ILS market has remained mostly detached from the disruptions seen in the credit markets, it continues. “Indeed, and perhaps not surprisingly, they appear more correlated to the actual natural catastrophe experience and underlying reinsurance pricing.”
Researchers went on to note that ILS pricing shifted upward following the heavy storm activity of 2005 and has subsequently fallen back during the credit crunch of the last year as underlying reinsurance rates have fallen.
“Looking forward, we expect that the fundamentals driving risk pricing in ILS in general and nat cat bonds in particular will continue to protect this asset class from the worst of the disruptions being felt elsewhere in the traditional credit markets.”