The European Securities and Markets Authority (ESMA) has sent a signal regarding the reconsideration of catastrophe bonds in UCITS portfolios. This decision may impact the market valued at $17.5 billion.
ESMA's Position on Catastrophe Bonds
ESMA has expressed concerns regarding catastrophe bonds, deeming them too complex and risky for retail investors. Approximately $17.5 billion of these securities are at risk of regulatory reclassification, which represents nearly one-third of the global market for catastrophe bonds estimated at $56 billion. The regulator pointed out the high level of risk and complexity associated with these assets, which necessitate a deep understanding of catastrophe modeling and risk transfer mechanisms.
Industry Reactions to ESMA's Warning
The warning from ESMA has received mixed responses. Some major players, like Neuberger Berman and PGGM, support the regulator’s caution, highlighting potential liquidity risks and significant possible losses. Peter DiFiore, CEO of Neuberger Berman, stated, "We have not yet seen a real liquidity event in this market." Conversely, some fund managers advocate for keeping catastrophe bonds in accessible portfolios, citing their exceptional performance in the past.
Market Consequences for Catastrophe Bonds
An unfavorable decision from European authorities could trigger a wave of forced sales, affecting liquidity and the financing conditions for reinsurers. As a result, some managers may entirely withdraw from this asset class, leading to a contraction in supply. Currently, the European Commission has yet to reach a final decision, with a consultation period expected to consider technical and political arguments.
The stance presented by ESMA resonates widely and could significantly alter the landscape of the catastrophe bonds market, impacting investment horizons in Europe.
