14 // THE DISASTER GAP: HOW INSURERS AND THE CAPITAL MARKETS CAN HARNESS BIG DATA TO CLOSE THE GAP


For big reinsurance buyers like government-backed catastrophe pools, securitising risk via catastrophe bonds also helps diversify the number of counterparties. A mixture of rated capacity and collateralised capacity is ideal, thinks the Turkish cat pool’s Ismet Gungor. “Risk carriers need diversification in their claims payment capacity – so for both sides there is demand.”


As cat bond pricing has come down – by nearly 40% since the end of last year – these structures have also become a more viable option. “In the past the cat bond market wasn’t attractive for us because there was huge capacity in the insurance market and the cat bond market was limited,” says Gungor. “There was a big difference in pricing the risk between cat bonds and reinsurance. Now there is only a little gap in the pricing.”


BARRIERS TO GROWTH


Investors have demonstrated they have appetite and capacity for new perils and new regions given the level of interest in issuances such as Bosphorus Re and the Mexican cat bonds issued via the World Bank’s MultiCat Program. “As investors get more comfortable with the emerging markets it will have a knock-on effect and people will be looking at more interesting markets,” says BNY Mellon’s Emma Wilkes.


To date, most investors in ILS restrict their mandate to modelled perils. This explains why the majority of transactions have been for US peak perils. “The alternative capacity is predominantly invested in a contained niche: non-proportional natural catastrophe business relating to specific peak risks like US wind and US earthquake, due to the very short-tail nature of this business and the availability of external models,” says Dr Andreas Müller who heads up the ILS Investments Department in Munich Re’s Risk Trading Unit. “Most funds outsource risk modelling to modelling agencies such as AIR Worldwide and RMS and as a result cannot sufficiently assess risks for commercially available models which do not exist.”


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