NU Online News Service, July 14, 2:32 p.m. EDT

A quiet second-quarter catastrophe-bond market reflects the desire among investors to put their money into places other than U.S. hurricane risks, a report from Willis Group Holdings says.

In a report titled “The Market Digests a New Hurricane Model Amid Light Issuance Volume,” Willis Capital Markets & Advisory (WCMA), a part of insurance broker Willis, notes that only four new catastrophe bonds were issued during the second quarter, amounting to close to $600 million. This is in contrast to the prior year's transactions that amounted to more than $2 billion.

With 71 percent of outstanding bonds dedicated to U.S. wind events, investors are seeking to diversify their portfolios.

Bill Dubinsky, head of insurance-linked securities at WCMA, says in a statement, “Investors have cash to invest and remain keen on risk in cat-bond form, but are somewhat starved of new issuance, particularly non-U.S. wind-exposed deals.”

He adds, “The cat-bond market should see an uptick in deals in the second half of 2011 as investors get more certainty around how the new RMS hurricane model will affect pricing. It will also benefit from the increase in ex-U.S. catastrophe-reinsurance pricing.”

In the report, James Kent, president of Willis Re North America, says that the situation would be helped if the markets offered “some capacity at higher expected loss and smaller limit sizes” in the $5 million to $25 million range. He understands that transaction expenses are “an impediment” to these programs developing at present, but hopes some structure could be develop to deal with this issue.

He notes too that small catastrophe bonds of this sort would help many smaller regional carriers.

As far as covered perils, Kent says there could be more done in the way of tornado and hail risk in the United States, “particularly if sold on an aggregate basis, and global flood risks.”

He says terrorism would also be a good program, but understands there are modeling issues associated with it that make it difficult to put into a catastrophe bond.