Catastrophe Bonds in Demand for Pensions

(March 1, 2011) — Pension funds are increasingly investing in catastrophe bonds and other insurance-linked securities.

While cat bonds currently represent less than 5% of the entire natural catastrophe reinsurance market, with less than $15 billion in outstanding securities, the new demand from pensions could more than double to $30 billion over the next decade, Christophe Fritsch, head of insurance-linked securities at Axa Investment Managers, the asset-management unit of Paris-based Axa, told Global Pensions.

Axa, Europe’s second-biggest insurer, has revealed that its funds investing in cat bonds and other insurance-linked securities may grow more than threefold as insurers manage their exposure to natural disasters by transferring potential losses to investment funds. Fritsch told the news service that he has witness a spike in the number of meetings he has had with chief investment officers of pension funds, which will likely result in higher investments from those funds.

While Munich Re has said it anticipates about $5.5 billion of new cat bond sales this year, Fritsch said he expects demand from pension funds will drive new issuance of cat bonds up to $7 billion this year.

Last week, Swiss Re said it obtained another $350 million in protection through the Successor X Ltd. catastrophe bond program, representing the fourth time the reinsurer has used the program to transfer risks covering North Atlantic hurricane and California earthquakes. Swiss Re noted that the transaction adds an additional $305 million of notes to cover itself against hurricane losses in some US. states and Puerto Rico and California earthquakes until December 2014.

Internationally, Swiss Re has said Australia’s natural disaster risk was on the rise, and consequently the reinsurer has urged the country’s government to cover damages using cat bonds as opposed to one-off disaster levies, Reuters reported. In response to recent flooding in Australia, the government introduced legislation to create a flood levy that would cover a $10 billion damages bill. “Mounting exposure in Australia to catastrophes…we feel requires a pre-emptive approach to financing disaster relief, particularly with government assets,” Mark Senkevics, said head of Swiss Re in Australia and New Zealand, according to the news service.