Insurers and capital markets need to harness big data to close disaster gap
LONDON, November 14, 2013 — The number of catastrophe or cat bonds outstanding could more than double from the current level of $19bn1 to $50bn by the end of 2018, according to a report from BNY Mellon, the global leader in investment management and investment services.
Cat bonds – which are growing at their fastest pace in six years2- are risk-linked securities that transfer a specified set of risks associated with hurricanes or earthquakes from an insurer or a nation state, to investors. The study: "The disaster gap: How insurers and the capital markets can harness big data to close the gap", includes contributions from some of the world's leading experts on cat bonds and big data3.
"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," said Dean Fletcher, Head of EMEA Corporate Trust at BNY Mellon. "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 the insurance industry approximately $13bn in the first half of 2013, and the overall economic losses were estimated at around $45bn. The industry therefore covered less than one third of natural catastrophes, leaving a global disaster gap of $32bn4.
Commenting on the report, BNY Mellon's International Head of Insurance Paul Traynor adds: "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." Traynor continued, "Never has 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 using their own capital, will encourage the capital markets to invest in more cat bonds."
The report suggests that a combination of legacy and predictive big data models will produce more robust risk modelling for cat bonds. These models should include unstructured data, fast changing data and data generated from an increasing number of sensors, mobile devices and social media applications.
BNY Mellon estimates the total amount of insurance-linked securities (ILS) outstanding could reach $150bn by the end of 2018. Of this, $50bn is expected to include publicly traded cat bonds. The report predicts a compound annual growth rate (CAGR) of 25 per cent for ILS as an asset class and 20 per cent for cat bonds as a subset of this. This compares to the CAGR of 24 per cent for ILS over the past 13 years and 30 per cent for cat bonds as a subset over the past nine years.
BNY Mellon acts as a trustee and paying agent, and collateral agent on cat bonds. It was trustee on 68 per cent of all cat bonds in 20125.
To view the report, please click here.
As of September 30, 2013, BNY Mellon Corporate Trust served as trustee and/or paying agent on more than 67,000 debt-related issues globally. Its clients include governments and their agencies, multinational corporations, financial institutions and other entities that access the global debt capital markets. The corporate trust business utilizes its global footprint and expertise to deliver a full range of issuer and related investor services and to develop customized and market-driven solutions. Its range of core services includes debt trustee, paying agency, escrow and other fiduciary offerings.
Corporate trust providers are appointed by corporations, municipal governments and other entities issuing debt to perform a variety of duties, including servicing and maintaining the debt issue, processing principal and interest payments for investors, representing investors in defaults, and providing value-added services for complex debt structures.
BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of September 30, 2013, BNY Mellon had $27.4 trillion in assets under custody and/or administration and $1.5 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com or follow us on Twitter @BNYMellon.
This press release is issued by The Bank of New York Mellon to members of the financial press and media. All information and figures source BNY Mellon unless otherwise stated as at September 30, 2013. The Bank of New York Mellon, London Branch, registered in England and Wales with FC005522 and BR000818. Branch office: One Canada Square, London E14 5AL. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorized by the Prudential Regulation Authority. The Bank of New York Mellon London branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request.
12013 year-to-date figure based on market data from Aon Benfield (expected to rise to $20bn by the end of 2013)
2BNY Mellon research based on market data from Artemis from http://www.artemis.bm/deal_directory
3 Loosely defined as the exploitation of voluminous, fast changing and unstructured data
5BNY Mellon research based on market data from Artemis from http://www.artemis.bm/deal_directory/