The more traditional securities tied to natural catastrophe losses, how- tion in 2005, after cat bonds, it likely will be the largest category
ever, have had a particularly active year, with unusual developments re- in 2006.
sulting from the severity of loss tied to the 2005 US hurricane season. The
Issuance was nearly $1.6 billion in 2005, or roughly 31 percent of the
unexpected level of damage not only appeared to have triggered the first
total industry’s annual securitisation. Issuance in 2006, however, is soaring;
total loss on a cat bond (Kamp Re 2005), but it also caused the leading ca-
it is already nearly double that of 2005 and well ahead of year-to-date 2006
tastrophe modellers to reassess their models. From a hurricane standpoint,
cat bond issuance.
updated models generally have significantly increased estimates of storm
frequency and insured damage. Applied to existing cat bonds, these new
Also in 2005, the life side saw active monetisation of premiums as well
models have considerably increased attachment probabilities.
as securitisation of future profits from a portfolio of in-force US life in-
surance policies. In the 2006 market, it is anticipated that a bond is being
The combination of modelling changes and an imminent cat bond loss
structured as a disability reserves securitisation, in an approach to free up
have created market perceptions of increased risk, and that has led to in-
regulatory reserve requirements.
creased interest rate spreads in the existing market. These conditions also
have made investors more cautious about the type of triggers they will
On the non-life side, again offering some competition to tradi-
accept in cat bonds, shying away from indemnity cat bonds.
tional reinsurance, new securitisation concepts have led to the imple-
mentation of working-layer securitisations for both credit insurance
From a rating agency perspective, however, non-indemnity cat bonds
and auto insurance.
come with basis risk. In this context, basis risk generally reflects the pos-
sibility that a cat bond may not be triggered for covered perils, because
Though still in its infancy, the general concept of insurers and reinsur-
the parameters or models used synthetically to activate the payout of the
ers transferring risks to the capital markets has gained broad acceptance,
cat bond were not well calibrated.
with new securitisation concepts surfacing with increasing frequency. As
the more-established instruments begin showing rapid growth in estab-
Due to this possibility of considerable basis risk, A.M. Best is in the
lished markets, some of the current innovations, such as working-level
process of establishing the amount of reinsurance credit that would accrue
securitisations, will spread in use and could become established markets
to insurance companies sponsoring such bonds.
by the end of the decade
Other insurance securitisations
Although collateralisation of Regulation XXX reserves on life insur-
ance policies was the second-largest area of total insurance securitisa- A.M. Best’s website is at
www.ambest.com.
BermudaReinsurance . September 2006 39
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