Cat bond concentration in Florida at risk with Irma looming

More than half of public property cat bonds could be impacted by Hurricane Irma if she makes landfall in Florida, according to AIR Worldwide.

Speaking to Global Reinsurance at this year’s Monte Carlo RVS, AIR Worldwide executive vice president Milan Simic said that we needed to keep an eye on the distribution of loss, given the cat bond coverage in Florida.

He said: “Florida is significantly covered by catastrophe bonds; 49 out of 88 public property cat bonds are exposed to Florida hurricane. So more than a half of property cat bonds have the potential of being impacted by this event [Irma].”

AM Best director Greg Reisner added during the AM Best RVS Reinsurance Briefing that a lot of the capital markets operating in this area do not have diversification and so will feel the brunt of Irma: “They don’t have the diversification that the traditional players have, so they’re are going to take a disproportional hit, no question. The capacity backs property cat primarily and it backs Florida property cat.”

While Reisner acknowledged that the AM Best view on this aspect of the market is speculative due to the ratings firm having no “interactive dialogue” with it, he believed it was reasonable to state that “they will definitely feel some pain”.

Reisner added that this could be the biggest test investors have had to face and it may alter their view of the risk. He said: “They’ve made a lot of money up until this point, because there haven’t been any losses. They have been tested in the past but they’ve been small; this may be the first meaningful test, where a broad spectrum of investors actually lose their invested capital. What will that mean for their risk appetite going forward? They will probably want a higher return. Will they be willing to take the risk again? That remains to be seen.”