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Bermuda:Re+ILS Spring 2016

46 Spring 2016 Bermuda:Re/insurance+ILS A couple of years ago, private catastrophe bonds were exactly what the name indicates: private. In 2014, however, the rapid growth of the ‘cat bond lite’ market brought such transactions into the public eye, especially as the global reinsurance and insurance-linked securities (ILS) market began to see the bond’s utility in tactical risk and capital management. And growth continued. Rapidly. Last year, publicly revealed cat bond lite transactions doubled year on year. Although the fourth quarter ended without any issuance activity, the market had plenty of chatter to suggest continued momentum into 2016. From quietly used and little known, cat bond lite has become one of the most interesting new developments in the ILS market. Still, many have yet to become familiar with this risk transfer vehicle, and if industry innovation proceeds as planned, perhaps a new form of securitised risk and capital management will emerge with even greater efficiency. So, what is cat bond lite? Simply put, cat bond lite is a securitised risk transfer approach that is streamlined relative to the extensive overhead necessary for a full 144A catastrophe bond transaction. The underlying programmes in cat bond lite use a wide range of triggers—including parametric, indemnity, and the PCS Catastrophe Loss Index—demonstrating the flexibility that the vehicle affords. In the case of index-triggered transactions, for example, a cat bond lite is basically an industry loss warranty (ILW) that’s been securitised. The growth and importance of cat bond lites Cat bond lites Tom Johansmeyer, assistant vice president—reinsurance services, marketing at ISO/Verisk Insurance Solutions, takes a look at the possible evolution of a product that is becoming increasingly important to the sector. As you can see, securitisation is the key ingredient in cat bond lite. That’s because this form of risk transfer was developed to help parties with liquidity mandates to transact in ILW and collateralised reinsurance transactions. The cat bond lite format is believed to make the underlying agreements more liquid (although there is some debate on this point). Originally a fund-to-fund tool, where the liquidity mandate originated, cat bond lite adoption has since spread to include traditional reinsurers as counterparties, which could provide even more room for this market to grow further. The increased penetration is evident in the growth of the cat bond lite market—in terms of both transaction volume and limit. In the first year that cat bond lite was a recognised force in the ILS market (2014), $242 million from 10 publicly revealed transactions came to market, with an estimated total market size of $500 million. A year later, publicly revealed activity reached $490 million from 16 transactions, ranging from under $10 million to more than $70 million. Half of 2015’s issuances used the PCS Catastrophe Loss Index, with five using indemnity triggers and three undisclosed. Growing footprint Given the growing footprint of the cat bond lite market, it’s easy to expect its convergence with the ‘traditional’ catastrophe bond market. However, that seems unlikely, as the deal sizes, parties, and purposes


Bermuda:Re+ILS Spring 2016
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