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CAT Bond Sales Up but Explosive Growth Not Expected

Trading in catastrophe bonds is expected to increase in this year's hurricane season, according to a recent Wall Street Journal report. As of June, some $657 million in cat bonds had been sold. The Journal writer predicted that cat bond sales for 2000 would be comparable to last year's total of $1.1 billion. While this is a tremendous increase over the trickle of cat bond sales in the mid-nineties, Joe Fedor, Executive Vice President of U.S. RE, doesn't expect explosive growth in this market segment over the next couple of years.

"The capital markets have become a permanent source of risk protection, but they have not become sophisticated enough to supplant reinsurance for earthquakes in California or Tokyo and hurricanes in Florida," Mr. Fedor said. "There's still enough reinsurance capacity available to fill insurers' perceived needs," he added. "So the capital markets alternative won't grow until the conventional market gets too pricey. Capital markets can deal with normal cat losses, but they haven't yet found ways to deal with whole-account exposures and casualty loss development, let alone the need for retrocessional protection - all areas for future expansion," Mr. Fedor explained. He does, however, expect cat bonds and other capital market devices to be used increasingly as part of an insurance company's total protection package.