A catastrophe bond market would open up more capital to the insurance market by allowing reinsurers to offload some of their exposure to ‘perils’ to cat bond managers. Nephila Capital, a specialist manager in this space, views catastrophe bonds as a useful function in areas prone to natural disasters. “Catastrophe bonds or other similar ways of taking that risk and spreading it over the reinsurance market, rather than just the insurance market, can be a very useful solution to places that have more catastrophe risk then they can comfortably digest,” says Nephila’s Barney Schauble. “And then, obviously, on the other side of it, there’s investors in Australia who are investing in this type of risk as something that’s a non-correlating diversifying risk in their investment portfolio. I think there are two sides of that market and it offers something to both sides.” Catastrophe bonds have always been more viable in areas where the capacity for insurance and re-insurance was limited; therefore the demand for catastrophe bonds was there.

Hannover Re’s senior underwriter, Axel Wichmann, says the peak areas of the US and Europe, such as Florida’s hurricaneprone coast, have always had a viable catastrophe bond market as their traditional insurance and re-insurance markets were not very efficient. In Australia, insurance pricing has been a deterrent for catastrophe bonds. “It has always been a function of price as to why cat bonds haven’t been as popular or widespread in Australia as in other regions,” Wichmann says. Traditional reinsurance has been preferred in Australia, according to Munich Re’s head of risk trading, Rupert Flatscher, because of the more “attractive” costs and broader coverage of natural disasters “In the past, the gap between traditional reinsurance and cat bond prices was the main reason why we have not seen any cat bonds in Australia issued by Australian sponsors. “The traditional insurance capacities for Australian natural catastrophe perils were not scarce in the last years.” Whether or not there is currently enough reinsurance capacity is quite unclear for Nephila’s Barney Schauble, who says a catastrophe bond market is definitely viable but it comes down to the question of capacity.

“I’m sure that if Australia – either on a governmental level or at the level of individual companies – if it decided to go and buy protection in the catastrophe risk market, I’m sure it’s something that could be executed. It’s more of a question of whether they need the additional capacity available from that marketplace.” Catastrophe bonds have also been less attractive in Australia due to the types of perils Australia faces: cyclones and storms, earthquakes, floods, hail storms and bushfires. Even though external catastrophe models used by cat bond managers are available for Australia and New Zealand cyclones, storms and earthquake, the bonds don’t traditionally cover flood, hail storms and bushfires. This is left to the traditional insurance market. “Even though there are some ongoing projects to develop flood, hail and bushfire models for Australia and New Zealand, when those will be finalised and accepted by cat bond investors is not foreseeable for the time being,” says Flatscher.