innovative portfolio modelling technology capable of setting triggers based on the performance of an insurer’s whole portfolio, taking into account factors including validated internal capital models and loss ratios.
“These deals effectively represent quota share deals, which insurers and
regulators will be comfortable with, but transferred into a bond that can be sold to capital markets investors,” McPherson says.
“The bondholder gets a straightforward fully collateralised bond not of claims across an entire portfolio. It will include some cat risks but everything else as well.
“The bonds will be triggered only by very adverse claims experience— with probabilities of one-in-100 or one-in-200. These bonds will not replace reinsurance; they will operate more at a capital level and reduce capital relief.”
McPherson admits that an education process will need to take place with
But he adds that many investors will be unperturbed by the concept since they already invest in similar risks in a different way.
“You can’t replicate the types of triggers used on cat bonds but many
investors are very familiar with whole portfolio insurance risks because they might be investing in equity or debt from this sector already,” he says.
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“What is more, they will also be used to triggers based on non-credit
events because of other forms of securitisations they invest in. We think investors will get comfortable with these deals quickly.”
McPherson adds that, unlike traditional risk transfer structures, this
product is aimed more at the CEOs and CFOs of insurers. “They will be planning the equity, debt and mix of risk transfer options available to them and this new product could complement those options,” he says.
“This could be of huge corporate value to a CFO. We also believe that it could grow as a product because of the competitive disparity that will emerge between those who use it and those that do not. In the same way strategy, the same could ultimately be true at a corporate level in relation to this product.”
The founding partners of Vario Global Capital expect the concept to develop and evolve.
While the initial purpose of the venture is to structure and place private placement bonds on the basis explained, Frankland says the project could evolve to the point that it launches and manages funds in its own right.
If this were to happen, Guy Carpenter would take more of a back seat,
he says. “Under those circumstances, we would dilute our involvement into a minority position. We would like to remain involved and perhaps we would become a preferred partner of the fund but it would no longer be appropriate to be a lead partner in those circumstances.”
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