How the insurance industry can use big data to deploy new capital

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The number of catastrophe bonds outstanding could more than double in size to $50bn by 2018, according to investment bank BNY Mellon.

The current level of cat bonds is $19bn, according to BNY Mellon in a new report.

BNY Mellon head of EMEA corporate trust Dean Fletcher said: “The initial investor base was dominated by hedge funds and private equity, but we are seeing more long-term investors such as pension funds buying cat bonds.

“Investors are attracted by the high yields in the current low interest rate environment. Cat bonds also offer investors a chance to diversify their portfolios because of the low correlation of risk between catastrophic events and broader financial markets.”

Globally, natural catastrophes cost insurers around $13bn in the first half of 2013, with wider economic losses of $45bn.

BNY Mellon said that therefore the insurance industry covered less than one-third of natural catastrophes, leaving $32bn uninsured.

BNY Mellon international head of insurance Paul Traynor said: “Insurers and the capital markets can help reduce the disaster gap by working together with big data to deploy new capital to cover new perils in new regions. This will reduce the cost of rebuilding for governments and provide a positive contribution to society.

“Never had the experience of the insurer been needed more. Deploying capital against previously uncovered risks requires deep underwriting and technical expertise. This expertise, as well as the comfort that comes from seeing insurers use their own capital, will encourage the capital markets to invest in more cat bonds.”

The report said that a mixture of legacy and predictive big data models will produce more robust risk modelling for cat bonds.

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BNY Mellon added that the total amount of insurance-linked securities (ILS) outstanding could reach $150bn by the end of 2018.

Of that figure, $50bn is expected to include publicly traded cat bonds. The report predicts a compound annual growth rate (CAGR) of 25% for ILS as an asset class, and 20% for cat bonds as a subclass. That compares to the CAGR of 24% for ILS over the past 13 years, and 30% for cat bonds as a subclass over the past nine years.