Japan: Catastrophe bonds dodge quake payout
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Japan: Catastrophe bonds dodge quake payout

9.0 quake didn’t trip parametric triggers; Reinsurers struggle to absorb losses

"Earthquake triggers on most cat bonds with Japan exposure tend to be measured in terms of geographic position and ground acceleration, usually severe ground motion in or around Tokyo. If the event does not meet these parameters as defined by the reinsurance contract, investors face no losses"

Sandro Kriesch, Twelve Capital

The costliest natural disaster of all time could drive further growth for the $12.9 billion ­catastrophe bond market, according to specialist investors who expect greater awareness of cat bond risk-adjusted returns to attract new capital into the sector.

"Landmark events like Hurricanes Katrina and Andrew in the US caused capital to flow into reinsurance and acted as a development catalyst for the cat bond market. If losses from the Japanese earthquake and tsunami cause premiums to rise, it could again widen the investor base," says Sandro Kriesch, partner at Twelve Capital, a Zurich-based investment fund specializing in natural peril catastrophe risk and the extreme mortality risk posed by pandemics.

At less than 1% of the Japanese government’s projected $309 billion total economic loss from the earthquake, tsunami and nuclear crisis, the $1 billion of catastrophe bonds potentially facing principal losses seems confusingly low.

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