September 2014 48 Bermuda:Re/insurance+ILS


Property Claim Services (PCS), a division of Verisk Analytics, for example, has been able to apply its industry loss estimates in the US and Canada “to provide greater flexibility in trigger structure—for both index-triggered and indemnity-triggered transactions”, said Joe Louwagie, assistant vice president at PCS. He explained that some index-triggered transactions had applied PCS estimates to personal and vehicle losses, excluding commercial losses, with PCS helping to transfer more than $1 billion of risk into the capital markets over the past two years.


Louwagie said that developments are delivering greater flexibility in the structuring of transactions, helping the market “refine the evaluation of opportunities, the deployment of capital and its portfolio management”.


Innovations have also been made in the area of parametric


triggers, with the New York Metropolitan Transport Authority’s MetroCat being a transaction of particular note. Steve Rooney, co-leader of Mayer Brown’s global insurance industry group, who was directly involved in the structuring of the transaction, said the trigger had sought to “as closely as possible replicate MTA’s exposure to storm surge”.


The parametric index uses water level calibrators around New York


City to act as a trigger, with the outcome being “a trigger design that makes sense for the MTA”, said Rooney. Other innovations are possible in the field of parametric triggers as the market explores new ways to unlock state-held, underinsured and emerging risk. Risks such as cyber will


likely encourage still further creative thinking with regard to trigger type. Rooney said that there has also been innovation in indemnity deals,


with features such as variable resets, which provide a sponsor with “more flexibility in establishing attachment points on a year-to-year basis in order to fit within its broader reinsurance programme”. Such features were not available to the convergence market a few years ago, he explained, but rising investor appetite for reinsurance risk has helped to generate a willingness to consider variable reset transactions, which will likely prove attractive to cedants.


Cat bond lite


Much has been spoken about the potential of cat bond lite transactions, but as Henning Ludolphs, insurance-linked securities (ILS) director at Hannover Re explained, execution has been squeezed by increasing competition in the traditional reinsurance market. “Many of the companies that might have considered cat bond lite transactions as an alternative or addition to their traditional reinsurance programmes are now staying with traditional reinsurance,” he said.


Nevertheless, they remain a “relevant” part of the market and Ludolphs anticipates them becoming increasingly popular should the market harden. “They are a good compromise for medium-sized companies that want to go to the capital markets, but for whom a


$100–$200 million transaction is too big. Cat bond lite transactions allow them access to convergence capacity.”


Ludolphs added that while currently such transactions account


for less than 5 percent, with some of this business being transacted privately, it is apparent that there is potential for growth. He could see this growing to 10 percent of annual issuance volume.


Louwagie said that if the cat bond lite market continues its “current momentum, gaining a broader base of participants” it could yet “open up a new market alongside the traditional 144A sector”. He said that while it is early days for such transactions, with only seven publicly- traded cat bond lite deals thus far, the market’s interest seems clear.


“If the risk transfer approach achieves critical mass, cedants will


have greater opportunity to transfer smaller, targeted risks with lower frictional costs.”


Such transactions are proving appealing to cedants looking to take advantage of current ILS pricing, even in the face of falling rates and


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