Swiss Re says the note program, launched through a special purpose vehicle called Australis, can be upsized to $250 million depending on how much new non-life business it writes in Australia. ôThe bonds have been fully collateralized, so they are credit risk free,ö says Keith Scott, Head of the insurance companyÆs property and casualty business in Australia and New Zealand.
The bonds pay a coupon of Libor plus 4% and carry a parametric index trigger. ôThat means we have set parameters based on the wind speed of a cyclone or the magnitude of an earthquake and if those parameters are triggered then Swiss Re can call the bonds,ö says Scott.
Scott says the likelihood of such an event is low. ôNorthern Australia gets a lot of cyclone activity and most of the capital cities on the eastern side of the country carry some earthquake risk,ö he says. ôBut we would expect that these cat bonds would not be exposed to loss more than twice in 100 years.ö
Swiss Re says the note program is introducing Australia to the idea of transferring risk to the capital markets.
Insurance linked bonds were first introduced in 1997 and since then $22.4 billion worth of securities backed by life and non-life policies have been issued û with $17 billion still outstanding. Last year was a record year with $5.3 billion issued to the capital markets, compared to $3.1 billion in 2004.
Scott says there has been a change in the profile of investors in recent years. ôThere are now more hedge funds and dedicated cat funds that buy these securities.ö
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