A spurious (yet timely) titled lead into an area of the catastrophe bond market that is often over looked—namely, the mortality catastrophe bond market.

The recent incidence of Swine flu has brought some attention to the mortality bond market, and cat bond market issuers and investors will doubtless be keeping a watchful eye on the development of the outbreak with some interest.

Artemis.bm  reports that there are currently somewhere between USD1.5-2bn of outstanding mortality bonds in the cat bond market. The majority of these bonds have been issued by Swiss Re (via the Vita Capital Series), and most recently by Munich Re in February 2008, with USD100m of risk transferred to the capital markets. Other notable issuers include Axa and Scottish Life.

How material an issue is the current outbreak for bond investors and issuers?

It is clearly far too early to state, given that we are in the early stages of the pandemic. However, it may be useful to provide some context. An extreme mortality bond pays out to the sponsoring insurer if the mortality index to which it is linked exceeds a certain rate, typically 20% or more above what is expected for a given population.

The 1918 Spanish influenza pandemic, in which more than 50m people died, is the benchmark by which all modern pandemics are measured. And for any bond to be triggered, we would expect to see mortality rates of this order (ie millions not hundreds or thousands). The early news stories around the current Swine flu has some interesting characteristics, including a higher mortality rate when compared to 1918, although as at 30th April, only one fatality has been reported outside of Mexico.

The Insurance Information Institute estimated in 2006 that even a moderate avian flu pandemic could cost the US life insurance industry $31bn in additional death claims, while a pandemic on the scale of 1918 could cost $133bn.

The market has yet to see any impact on bond pricing – primarily due to a) the magnitude of the fatalities to date, and b) the geographic areas impacted (ie limited to Mexico). There may be far more concern if the number of reported cases increases exponentially and begins to impact the US and western Europe in particlar.

So the market will continue to watch the developing situation with interest, as will we all…

Tags: Bonds, Flu, Natural catastrophes, Pandemic

This entry was posted by Vinay Mistry on Thursday, April 30th, 2009 at 9:10 am and is filed under Exposure Management.