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Banking

Catastrophe bonds dodge Japan quake payout

9.0 on Richter scale did not trip parametric triggers; investors benefit but reinsurers will struggle to absorb losses

The most costly 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 the re-insurance sector and acted as a development catalyst for the cat bond market. If losses from the Japanese earth quake 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 one percent of the Japanese government’s US$309 billion projected total economic loss from the earthquake, tsunami and nuclear crisis, the US$1 billion of catastrophe bonds potentially facing principal losses seems confusingly low. Oakland, California-based catastrophe modeller Eqecat explains that although total insured losses could range from $15 billion to $22 billion, global re-insurers’ exposure will be capped by Japan’s earthquake re-insurance scheme, which is expected to foot $2 billion to $4 billion of the non-life losses. "The range of insured losses affecting Japan's Kyosai (commercial/industrial insurers) is around $4 billion to $7.5

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