The market for insurance-linked securities such as catastrophe bonds continues to expand and is broadening beyond US perils, says Swiss Re in a study of the market.

The reinsurer says the investor and sponsor base comprises stable, long-term participants and the market is becoming more sophisticated in how it measures and offers risk.

The report follows research by Aon Benfield that found the outlook for the market is healthy [insuranceNEWS.com.au, September 5].

Both reports note that cat bonds provide diversity of risk transfer.

Swiss Re says that when pricing is attractive relative to traditional reinsurance, cat bonds can act as a substitute layer in an existing reinsurance tower.

“Also, with a typical multi-year duration, the sponsor can secure protection across several renewals, partially uncoupling from the pricing cycle and decreasing earnings volatility.”

It says sponsoring a cat bond has offered insurers, reinsurers, corporations and governments the opportunity to purchase less reinsurance or hold less capital.

Investors have benefitted from excellent performance and a method of improving their risk profile. They have been paid a “novelty” premium because many investors are unfamiliar with cat bonds, although the report says the premium is starting to fall.

It notes that investors within the market are seeking diversification and says perils that offer this often receive favourable pricing.

The report says cat bonds can be less expensive than reinsurance in a hard market but are likely to be less attractive in a soft market with excess capacity.