Hurricane Ian shock to the cat bond market (2022)
The first major test of the cat bond market by a large Florida hurricane: a sharp price drop in September 2022, then the first annual decline of the Swiss Re index.
A cat bond has no deep market price: when a hurricane makes landfall, nobody yet knows the losses, yet dealers still have to quote every exposed note. The marks in the following days therefore reflect a highly uncertain loss estimate, a liquidity discount and fear of trapped collateral, far more than a realized loss. Ian showed how wide that gap can be: UCITS funds, which must publish a net asset value, had to book declines that later settlements partly reversed. The shock hit hardest the indemnity notes of small Florida insurers, already weakened by litigation, while higher layers on index triggers came through almost untouched. It then led investors to demand wider spreads and higher attachment points at the 2023 renewals.
Ian made landfall in Florida on September 28, 2022, as a Category 4 storm; on October 3, Verisk estimated insured losses at 42 to 57 billion dollars. At the first calculation after landfall, on September 30, the Swiss Re global cat bond index was down about 10 percent and its U.S. hurricane sub-index about 32 percent; the index ended 2022 down 2.2 percent, its first negative year.
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.