LONDON, Nov 28 (Reuters) - Booming demand for catastrophe bonds should make them accessible and affordable for smaller insurance companies looking for alternative ways to cover themselves against natural disasters, according to the world’s biggest reinsurer Munich Re.
The bonds - which lets insurers lay off some of the risk of hurricanes and other natural disasters to bondholders - have typically been the domain of large insurance carriers, such as Swiss Re, Chubb Corporation and Allianz , who can afford the expensive fixed costs associated with issuing a transaction.
But 42 percent of insurers and reinsurers selling cat bonds and other insurance-linked securities (ILS) have upsized their initially planned issuance this year, reflecting high levels of investor demand, the world’s biggest reinsurer said in a report.
Relatively new instruments, cat bonds and ILS have burgeoned thanks to a growing perception that they are insulated from mainstream financial and economic shocks. The rise in overall volume and growing familiarity with the bonds from institutions should begin to depress the costs of issuing them.
Smaller insurers have in the past been discouraged from issuing cat bonds due to the high transaction costs, which can reach $1 - $2 million from hiring risk modeling firms, rating agencies and legal counsel.
Typically, individual cat bond issues have not dipped below values of around $100 million but Munich Re said that may now change to accommodate more issuers.
Investors in cat bonds usually receive interest payments and are required to pay out only under specific conditions. The insurer uses the proceeds of the bond sale to absorb some of its losses.
Smaller deals have been completed in the past.
In 2011, Towers Watson Capital Markets (TWCM) - a subsidiary of Towers Watson - sold $11.95 million of notes to a syndicate of capital market investors via a cat bond called Oak Leaf Re 2011-1.
Issuance of cat bonds reached $4.1 billion at the end of September - leading to a record volume of $14.8 billion in outstanding capacity, Munich Re said.
Issues of cat bonds so far in 2012 have exceeded maturities by just over $2 billion, driven by cash-rich ILS funds driving demand for new issuances beyond the reinvestment need from maturing cat bonds, Munich Re said.
Total issuance volume should reach at least $6 billion in 2012.
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