‘Cat bonds’ may turn into dogs for investors

MONACO, Sept 14, (AFP): Investors in “cat bonds” – or catastrophe bonds – may find themselves in financial straits after insurers tot up their losses from hurricanes Harvey and Irma and put the nascent alternative reinsurance market to the test.

In recent years, cat bonds have enjoyed incredible growth in the United States as insurers seek a more affordable option than taking out a contract with traditional reinsurers.

Much like with a traditional bond, investors hand over a sum of money to obtain a cat bond, and are paid interest. They have been attractive to investors in the current low-rate environment as they often offer higher interest.

The catch is that if the natural disaster specified in the bond takes place the insurer may not pay back part or all of the bond and use the funds to cover its losses or replenish its capital.

However, without a major hurricane in recent years, investors have been snapping up cat bonds.

In 2016, the alternative reinsurance market was worth $81 billion, after expanding by nearly 13 percent for two straight years, according to data from British reinsurance broker Aon Benfield.

That put it at just under 14 percent of the size of the traditional reinsurance market.

But the favourable winds may be over.

“Harvey and Irma are significant events for the sector... They will be a test for alternative capital,” said Torsten Jeworrek, a member of the management board at German reinsurance giant Munich Re, at an industry conference in Monaco this week.

Jeworrek also estimated Harvey, which lashed Texas and Louisiana with unprecedented rain last month, could end up costing insurers between $25 and $30 billion (21 and 25 billion euros).

Damage estimates for Hurricane Harvey, which made landfall in Texas on August 26 before returning out to sea to then lash Louisiana, vary from around $50 billion to well in excess of $100 billion.

However, not all property was insured or fully insured.