28 January 2014ILS

Data must come first as cat bonds reach for new geographies

Catastrophe bonds could be useful tools in developing markets, EY partner Craig Redcliffe tells Bermuda:Re, but reliable data and accurate models must be developed first.

Redcliffe says: “there is certainly investor interest in diversification, whether it’s from perils or geography. I do think that the geographical expansion we’ve seen in the past year will continue however investors will first need to be comfortable that there is sufficiently reliable data available for those new geographies in order to develop reliable triggers.”

While deals have been done in non-traditional zones, they tend to rely on simple parametric triggers while established cat bond markets have been trending towards indemnity triggers.

He continues: “having models that can accurately forecast the probability of a disaster in a specific area is critical when you’re pricing a cat bond. These models can be tremendously complex-- in many cases far too complex for an emerging market to handle at first.”

Players in emerging economies tend to lack capacity and knowledge of cat bond deals, Redcliffe says, and often can’t access the vast number of skilled service providers required to structure a deal. Redcliffe cites the World Bank’s Multicat program, which is intended to provide developing nations protection from catastrophic events through access to catastrophe bonds, as an example. Despite the offer of support and technical assistance from the World Bank only Mexico has taken part since the program’s establishment in 2009. Mexico issued cat bonds in 2009 and 2012.

It will take the interest of various global players, Redcliffe says, to make the use of catastrophe bonds widespread in the developing world. “Right now the industry is very focused on the US and more established countries in Europe and Asia. It’s easier to do the deals we’ve always done. As long as there is a strong pipeline of deals, I don’t see a strong push to market deals in emerging markets. There needs to be sufficient volume in the area to justify the research and product development in a specific area before a deal can be consummated.”

Pete Cangany, partner and Bermuda Insurance Leader at EY, adds: “that being said, the fact that Turkey was involved in a cat bond is interesting given the political climate. It shows that people are getting more comfortable with these developing economies. As Craig indicates, the statistical data has got to be first, followed by increased confidence of the business community, but things will move along much more quickly than some might think.”