The number of catastrophe or cat bonds outstanding could more than double from the current level of US$19 billion to US$50 billion by the end of 2018, according to a report from BNY Mellon.
Cat bonds – which are growing at their fastest pace in six years – are risk-linked securities that transfer a specified set of risks associated with hurricanes or earthquakes from an insurer or a nation state, to investors.
The study: ‘The disaster gap: How insurers and the capital markets can harness big data to close the gap’, includes contributions from some of the world’s leading experts on cat bonds and big data.
Dean Fletcher, head of EMEA Corporate Trust at BNY Mellon, said: "The initial investor base was dominated by hedge funds and private equity, but we are seeing more long-term investors such as pension funds buying cat bonds. Investors are attracted by the high yields in the current low interest rate environment. Cat bonds also offer investors a chance to diversify their portfolios because of the low correlation of risk between catastrophic events and broader financial markets."
Globally, natural catastrophes cost the insurance industry approximately US$13 billion in the first half of 2013, and the overall economic losses were estimated at around US$45 billion. The industry therefore covered less than one third of natural catastrophes, leaving a global disaster gap of US$32 billion.
Paul Traynor, international head of insurance, BNY Mellon, said: "Insurers and the capital markets can help reduce the disaster gap by working together with big data to deploy new capital to cover new perils in new regions. This will reduce the cost of rebuilding for governments and provide a positive contribution to society. Never has the experience of the insurer been needed more; deploying capital against previously uncovered risks requires deep underwriting and technical expertise. This expertise, as well as the comfort that comes from seeing insurers using their own capital, will encourage the capital markets to invest in more cat bonds."
The report suggests that a combination of legacy and predictive big data models will produce more robust risk modelling for cat bonds. These models should include unstructured data, fast changing data and data generated from an increasing number of sensors, mobile devices and social media applications.
BNY Mellon estimates the total amount of insurance-linked securities (ILS) outstanding could reach US$150 billion by the end of 2018. Of this, US$50 billion is expected to include publicly traded cat bonds.
The report predicts a compound annual growth rate (CAGR) of 25% for ILS as an asset class and 20% for cat bonds as a subset of this. This compares to the CAGR of 24% for ILS over the past 13 years and 30% for cat bonds as a subset over the past nine years.
BNY Mellon acts as a trustee and paying agent, and collateral agent on cat bonds. It was trustee on 68% of all cat bonds in 2012.
As of September 30, 2013, BNY Mellon Corporate Trust served as trustee and/or paying agent on more than 67,000 debt-related issues globally. Its clients include governments and their agencies, multinational corporations, financial institutions and other entities that access the global debt capital markets.
The corporate trust business utilizes its global footprint and expertise to deliver a full range of issuer and related investor services and to develop customized and market-driven solutions. Its range of core services includes debt trustee, paying agency, escrow and other fiduciary offerings.
Corporate trust providers are appointed by corporations, municipal governments and other entities issuing debt to perform a variety of duties, including servicing and maintaining the debt issue, processing principal and interest payments for investors, representing investors in defaults, and providing value-added services for complex debt structures.