The catastrophe bond market had record issuance in 2002 of $1.2 billion, exceeding the previous high of $1.1 billion set in 2000, according to a new report co-sponsored by Guy Carpenter & Company, Inc. and Marsh & McLennan Securities Corporation, the specialized investment banking arm of Marsh & McLennan Companies.
Catastrophe bonds were developed in the mid-1990s to facilitate the direct transfer of catastrophe insurance risk from corporations, reinsurers and insurers to investors. The study determined that since 1997, when the market began in earnest, 46 catastrophe bonds have been issued, with total risk limits of more than $6 billion, or approximately $1 billion a year.
“The catastrophe bond market has emerged as a complement to the capacity available from the reinsurance market,” said Christopher McGhee, managing director of Marsh & McLennan Securities Corporation. “Catastrophe bonds work best as a source of capacity for companies with large risk transfer needs, which are typically the largest insurance and reinsurance companies.”
The report examines the current state of the catastrophe bond market and its evolution to date, and provides a survey of the perils by territory of the risks securitized to date. Notable developments in 2002 include:
*Reinsurer-sponsored transactions outpaced insurer-sponsored transactions in 2002, as large reinsurers increasingly dominated the sponsorship of catastrophe bonds.
*The first corporate-sponsored transaction covering a US peril was completed in 2002, when Vivendi sponsored the issuance of a bond to provide protection against earthquake damage to its Universal Studios holdings in Southern California.
*The trend toward larger catastrophe bond issuances continued in 2002, with average issuance at an all-time high of $174.1 million, up from $138.1 million in 2001.
*The first catastrophe bond shelf offering – Swiss Re’s $2 billion Pioneer 2002 Ltd. transaction – was conducted in 2002, facilitating fast and efficient issuance of securities to the catastrophe bond investment community.
“Catastrophe bonds have evolved significantly since the early days of the market,” said McGhee. “In the past five years, bond structures have become more standardized and the investor base broader and more sophisticated. Further developments are certain as new issuers and investors enter the marketplace and refinements in bond structure are introduced.”
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