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Business interruption risk not a significant concern for the cat bond market

Executive summary:

  • The cat bond asset class continues to meet investor expectations, delivering returns lowly correlated to broader investment markets during this period of COVID-19 led volatility
  • Possible (re)insurance industry exposure to business interruption claims due to the pandemic is under close stakeholder scrutiny given the scale of economic loss being suffered
  • Cat bonds are standardised transactions providing coverage for natural perils or, in some cases, named perils only. Pandemics are usually not part of this coverage and hence there is no exposure to COVID-19 related business interruption claims across almost all cat bonds
  • Twelve’s legal analytics team has identified only one cat bond program (from the approximately 200 bonds assessed), as theoretically being at risk to business interruption losses due to the inclusion of unspecified naturally occurring ‘other perils’ coverage
  • As a result, Twelve views the risk of COVID-19 related business interruption claims feeding into the cat bond market as very low, highlighting again the resilience of the asset class and the benefits of standardised structuring and legal documentation
  • A small handful of cat bonds are exposed to the COVID-19 situation, but this is by design. This includes the bonds sponsored by the World Health Organization which specifically cover pandemics (both of which have suffered either a partial or full default)

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