European sovereign debt, U.S. default and the catastrophe bond market


With the world experiencing turbulent times economically this year including the concerns over European sovereign debt and the spectre of the U.S. government debt ceiling being breached effectively putting the U.S. into a default position, we felt it was time to ask one of the rating agencies whether they felt there was likely to be any impact on the catastrophe bond market.
The risks posed by sovereign debt issues are currently the main source of concern for the insurance and pension sectors in Europe according to the recent financial stability report published by the European Insurance and Occupational Pensions Authority. They say that the extent of the impact of sovereign debt will depend on the ability of nations globally to lower the debts towards more sustainable levels.

With an issue the size of sovereign debt there is bound to be a knock on effect for the re/insurance industry and also for the capital markets. We’ve already seen some investors dumping Eurobonds and attempting to move into safer assets. Obviously insurance-linked securities and more accurately catastrophe bonds offer one of the best alternative investments for investors seeking a safe harbour and this is likely at least part of the reason for high demand from investors recently.