The market for alternative financial instruments to traditional reinsurance continues to expand rapidly. As of September 2014, outstanding issues of cat bonds, sidecars and securitizations had reached around 70 billion dollars worldwide, up 25% on the previous year.
The data is contained in the latest issue of ANIA Trends, the newsletter of the ANIA research office which has dedicated a specific study to "Reinsurance and the cat bond market in 2014". Particularly lively in this segment was the activity of issuing financial instruments dedicated to the reinsurance of natural disasters, the cat bonds. In 2014, 27 new operations were carried out with a collection of over 8 billion dollars, bringing volumes back to the levels reached before the subprime mortgage crisis (2007).
Although the majority of new products continue to focus on natural disaster risk coverage in North America, a not insignificant share has concerned health and life risks. Bond spreads, in relation to the size of the risks covered, show wide differences - between 200 and 975 basis points - with a "significant downward pressure on their yields" exerted in recent years by the growing liquidity of the market and the greater familiarity of operators towards the new tools.
The price trend of cat bonds in the secondary sector was positive and relatively stable over time. The synthetic price index developed by Swiss Re shows, for the period 2002 – 2014, an average annual return (coupon included) of 8,3%, in line with the performance of the Barclay's High Yield index (+ 8,2%) and higher than that of the US S&P 500 stock index (+6,5%) As regards, more generally, the performance of the world reinsurance market, 2014 was characterized by a further expansion of capitals made available to the insurance sector.
At the end of the third quarter, these amounted – observes ANIA Trends citing the estimates of the broker Aon – Benfield – to 575 billion dollars, up by 6,5% compared to the end of 2013. For the sixth consecutive year, the global reinsurance capacity has grown despite the more contained trend in losses caused by natural catastrophes which fell to less than 40 billion compared to the peak of 130 recorded in 2011. Such a trend is in contrast with the normal trend of the reinsurance market in which the supply of capital expands following the increase in insurance rates induced by an increase in claims. All this has strengthened among analysts – underlines ANIA Trends again – “the theory of a new long-term equilibrium of the cost of equity at significantly lower levels”.
