Aon: Cat Bonds, Collateralized Re to Grow in 2010

Chris Westfall
Chris Westfall

A combination of carriers topping out on their reinsurance programs and a better pricing environment will allow catastrophe bonds to match or even surpass the over $3 billion in issuance set in 2009, according to a report released today by Aon.

“[Several] factors all bode well for the market in 2010 as more than $2 billion of currently outstanding bonds are expected to mature in the second quarter of 2010 alone,” Aon said in a report titled Reinsurance Market Outlook: Remarkable Recovery.

Despite rebounding from the financial crisis that created huge investment losses earlier in the year, property catastrophe reinsurers will continue to act conservatively with capital. The report says that many carriers have taken the maximum participation in their traditional reinsurance and will seek out cat bonds as “high quality capacity near the top of their programs.”

Additionally, while cat bonds continue to be a more costly alternative to traditional reinsurance the price gap is narrowing.

“Pricing is now reasonably, but not directly, comparable to traditional reinsurance,” the report says, adding that ILS currently represents 10 percent of $12.9 billion in property catastrophe capacity.

Collateralized reinsurance will also maintain its popularity as reinsurance investors continue to set up unrated reinsurers that full collateralize limits. “Collateralized reinsurance will continue to be an important source of capacity for significant buyers of catastrophe capacity,” the report says.

Other popular alternative structures such as side cars and exposure swaps, however, will struggle in 2010, Aon cautions.

“Real demand from reinsurers for sidecar capacity is likely to decrease further in 2010 as most leading reinsurers will again have more capital than they can deploy in the reinsurance market,” the report explains.

And although some carriers entered the exposure swap market in 2009 by exchanging their U.S. hurricane and earthquake risk for Japanese typhoon and earthquake, many remain “uncomfortable” with the practice, the report says.