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Just how uncorrelated catastrophe bonds and insurance-linked securities are with the wider financial markets is a point worth considering. We’re currently living in a time of unprecedented financial and economic upheaval due to the Eurozone sovereign debt crisis and U.S. economic issues, with many countries now officially in deepening recessions and the very real spectre of a country exiting the Eurozone a growing possibility. Of course, as any sensible observer realises, no financial instrument can be truly uncorrelated from market impacting events of this size.
In their latest quarterly ILS market report, Aon Benfield discuss the Eurozone crisis, and its impact on the insurance, reinsurance and cat bond / ILS markets. They note that contrary to the widely held thought that cat bonds and ILS are as uncorrelated a financial instrument as you can invest in, in the case of a Eurozone breakup, the catastrophe bond and ILS market will not be immune and there would be direct impacts.