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Catastrophe bonds hit record levels

A flurry of fourth-quarter activity resulted in a record catastrophe bond issuance of $US8 billion ($10.26 billion) last year, according to reinsurance broker Guy Carpenter.

Total risk capital outstanding at December 31 was $US22.87 billion ($29.32 billion), the most the market has supported.

More than 80% of bonds were structured with an indemnity trigger on either a per-occurrence, annual aggregate or multi-year aggregate basis.

“The use of indemnity triggers increased steadily from a low of 30% in 2011 to 55% in 2013,” the Marsh subsidiary says.

Persistent growth indicates maturity and stabilisation of the market, and the influx of third-party capital has brought down pricing.

“The continued low interest rate environment encouraged institutional investors such as pension funds and hedge funds to seek the higher yields offered by natural cat risk notes.”

Guy Carpenter expects continued use of the insurance-linked securities market this year, with more innovative bonds issued.

Structural features accepted on a larger scale could include non-modelled natural perils such as meteorite impact, wildfire and volcanic eruption, man-made perils including terrorism, and longer-duration bonds of more than five years.