Hurricanes will test cat bonds

Credit Suisse’s cat bond manager Niklaus Hilti has warned that this year’s expected busy hurricane season, with as many as 23 storms predicted, will “be a real crash test for the cat bond market,” Bloomberg reports.

“Cat bonds with their collateralised structure could prove to be a much safer risk transfer for insurers,” he says.

Bong buyers demand yields above benchmark interest rates because they may lose their entire investment if disaster strikes.

Storm worries

The US National Oceanic and Atmospheric Administration (NOAA )predicts 14 to 23 named storms during this year’s Atlantic hurricane season.

“An extraordinarily large event may impair traditional reinsurers’ ability to pay, but that’s not a concern with a cat bond,” said Dave Fields, chief reinsurance officer of AIG’s P&C division Chartis.

Cat bonds have not paid

Buyers of Zurich Financial Services Kamp Re 2005 cat bond were the first cat bond investors to lose money, after Hurricane Katrina, the costliest storm in history, hit the US Gulf Coast.

Standard and Poor’s said part of the Avalon Re cat bond, which covers energy-industry owned insurer Oil Casualty Insurance and matured on 7 June, paid out parts of its principal to the insurer after losses.

Munich Re and Swiss Re have both estimated that cat bond sales may climb 43% to $5bn this year as maturing notes are replaced and new investors enter the market.