Turkey earthquake unlikely to impact cat bond performance: Plenum

The devastating magnitude 7.8 earthquake that struck southern Turkey this morning is unlikely to have a noticeable effect on the performance of catastrophe bonds, given Turkish quake risk is only a minor component of some retrocessional deals, Plenum Investments has said.

We reported this morning about the terrible damage caused by this earthquake, which is now thought to have killed more than 1,000 people, over 900 in Turkey alone, with another few hundred killed in Syria.

More than 2,000 buildings are thought to have collapsed in Turkey alone, raising the prospect of a particularly costly catastrophe event for this part of the world, with some ramifications for insurance and reinsurance markets.

In particular, as we reported earlier, the Turkish Catastrophe Insurance Pool (the TCIP) reinsurance tower is thought likely to respond to such a damaging earthquake, which means some international reinsurers could be on the hook for a share of losses.

Some major reinsurance firms have retro catastrophe bonds that feature Turkish earthquake risk as one of the perils covered, and cat bond focused investment manager Plenum commented on this today.

“The tragic event is unlikely to have a noticeable impact on the performance of CAT bonds,” Plenum Investments said.

“Earthquake in Turkey is only a marginal component of the CAT bond market in some retrocession covers,” the ILS manager continued. “The affected provinces are far from the large concentrations of value and population in Turkey, so the damage is unlikely to be sufficient to trigger claims payments from these transactions.”

A number of prominent cat bond sponsors have included earthquake risk in Turkey within their retro cat bond deals in the last couple of years.

These include Fidelis with its $150 million Herbie Re Ltd. (Series 2021-1) cat bond, Hannover Re’s $100 million 3264 Re Ltd. (Series 2022-1) cat bond, and Arch Capital’s $150 million Claveau Re Ltd. (Series 2021-1) cat bond.

Given how Turkish earthquake risk features in multi-peril, typically aggregate retro cat bonds, it’s safe to assume it’s a peril that features more broadly within collateralised retrocessional reinsurance arrangements, as well as the sidecar structures of the major reinsurers.

However, any impact to the insurance-linked securities (ILS) market, even through private collateralised retro arrangements and sidecar vehicles, would be expected to be relatively minor, given the lower-level of insurance penetration generally seen within Turkey and the region.

Also read: Turkey hit by M7.8 earthquake. USGS gives 34% chance damages rise above $1bn.