SHIFTINg
SPACE
The insurance-linked security (ILS) space accommodates a spectrum of were very much focused on US peak perils, windstorm and quake, but
different products, including cat bonds and relatively new index-traded insurance over recent years, a number of additional perils and regions have started
products such as IFEX and the Carvill hurricane index, but also extends to more to be covered, and last year saw the first bonds explicitly covering UK
traditional products in the market such as industry loss warranties. floods and Mediterranean quakes. Different bonds also offer various
types of insurance coverage, including both traditional property damage
A broad spectrum of different products is available that operate on
and the business interruption element that is coming into play. One
a number of different bases. Notable similarities exist, however, in all
of the prime examples was a Munich Re bond issued on behalf of a
those different types of products, in that they are insurance contracts;
Japanese railway company last year (the MIDORI bond).
there needs to be a demonstrable transfer of risk in terms of the product
being made available to any potential counterparty; and various different Pricing is very much a function of the product that’s on offer, and
triggers need to be reached in order for those products to become ‘live’. that will change dynamically over time. But a function of education
and understanding is also at play in this sector. Among the new types of
It is widely argued that potentially positive effects are yet to arise from
investors entering this alternative space are players who understand cat
a general maturity in the capital markets as players become increasingly
risk reasonably well, and others who are not quite as close to it. “Within
at ease with these alternative products. From a cat bond perspective,
that slight difference between investors’ knowledge, there is therefore
the market really kicked off in 1997, very much driven by the likes of
an opportunity to differentiate pricing on that basis,” says Mistry.
Swiss Re. It has only been in the last five or so years that a number of
additional alternative parties have come to play in this space.
Vinay Mistry, manager of exposure management at Lloyd’s, says: “I’d
consider the [cat bond] market to be still in a fairly nascent phase. Pros and cons
There has been a lot of talk about how the market will grow over the
The only cat bond to have incurred maximum losses recently was
next five or 10 years. Once we reach the 10-year stage, we will be able
Kamp Re, the Swiss Re bond triggered by Hurricane Katrina. A number
to talk about a slightly more mature market. Meanwhile, there is still
of people see cat bonds as being fashionable, but other consistent
plenty of room for growth.”
purchasers of cat bonds use them as a strategic move to protect their
In 1997, investors in these products were insurance and reinsurance balance sheet, Mistry says.
companies. In more recent times, the profile of investors in this space has
The pros are definitely within the capital efficiency space, with
changed to encompass investment banks and hedge funds, in addition to
participants locking into pricing and using cat bonds as a means of helping
asset managers looking for a diversifying investment for their portfolios.
to manage the insurance cycle. Meanwhile, in terms of the constraints,
From that perspective, catastrophe bonds are considered to be a non-
there is a degree of truth in the argument that these products have so
diversifying asset class. A number of commentators have suggested that
far been untested. Looking at it from a macro-economic perspective,
cat bonds have performed reasonably well when compared to a range
questions have arisen regarding the ratings of bonds generally. “It is still
of corporate bonds over the last year or so.
quite a new area and we will see further developments within the next
Pricing within the ILS sector is very much a function of the size of five to 10 years,” Mistry says. “Depending on the level of catastrophe
what is being offered, the geographic region being covered and the activity and developments in the wider economic environment, we may
associated perils. Back in the early stages of development, cat bonds see a slightly different profile of investors.”
Bermuda Re/insurance . September 2008 19
Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68