September 2014 52 Bermuda:Re/insurance+ILS
CATstream is broadly structured to accommodate indemnity loss transactions as well as index triggers, leveraging the capabilities of PERILS and PCS for index-linked transactions in Europe and the US respectively. This enables CATstream to be “as broad as possible”, offering bond structures that can satisfy the full gamut of client needs. Presently, CATstream targets US and European perils—which account for the lion’s share of global issuance—but Schultz said that in the future there was potential for iterations of CATstream to address other geographies, as interest in cat bonds deepens in those regions.
Complementing these capabilities are relationships with all three of the major catastrophe modelling agencies—AIR Worldwide, EQECAT and RMS—alongside capabilities delivered by Aon Benfield’s own catastrophe modelling team, Impact Forecasting. Together these capabilities are helping to create a broad-based platform that will enable clients to thoroughly analyse the underlying peril and the transaction. Again, clients are able to draw upon Aon Benfield Securities’ deep, existing relationships with the modelling firms in order to streamline and simplify the cat bond process.
Schultz said that Aon Benfield Securities is confident about the prospects for growth among small to mid-sized cedants, with the company fielding considerable interest from insurers keen to explore the potential of the cat bond market.
“Historically, it has tended to be our larger clients that have accessed the cat bond market because intuitively it made sense for clients purchasing say $1 billion of property cat reinsurance to explore $200 to $300 million of diversification through the capital markets, while for clients purchasing less than $400 million of overall reinsurance coverage it made less economic sense,” he said.
However, CATstream aims to change the calculus, delivering a mechanism whereby Aon Benfield Securities helps bear some of the fixed costs embedded within the issuance process, enabling smaller cedants to access the cat bond market.
“We are bullish about the ILS space and the capacity coming in. We decided to make an investment in CATstream and to bear the associated costs in order to make cat bonds available to clients on a variable cost
“CATstream can offer a solution to cedants whether they are looking to place a layer or a whole programme, helping them to react to specific market needs throughout the cycle.”
basis. We believe that over time having a product that broadens access to the ILS market for clients will be well received by the marketplace.”
Simplification will also help to drive secondary market trading, with
familiarity with the documentation and good transparency “all helpful in creating greater liquidity. Transparency is critical on both sides of the trade”, explained Schultz.
Schultz said that the wider simplification of transactions will help to
drive further growth in the cat bond and the broader ILS market. He said that as the scope of the market—by peril and geography—grows, so too will the need to deliver products and ideas that can compete with the traditional reinsurance market.
“To continue to grow, the cat bond market needs to attract new types of clients, deliver access for cedants and investors, and continue to drive innovation around peril and structure-type.”
Schultz sees healthy competition in the ILS and reinsurance space, adding that the ILS industry needs to work to build meaningful relationships with the market and to “develop relationships right across pricing and market cycles”. Products such as CATstream will help to create these connections, while delivering valuable capabilities to an increasingly diverse segment of the insurance market.
Paul Schultz is CEO of Aon Benfield Analytics. He can be contacted at:
paul.schultz@
aonbenfield.com
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