Cat bonds key to closing protection gap
Sponsoring transparent and understandable
cat bonds—including bonds that use
parametric triggers—could become one of
the most effective risk transfer instruments for
emerging economies to resolve the developing
issue of the protection gap at the macro level,
Kirill Savrassov, CEO of Phoenix CRetro, a niche
Bermudian ILS specialist, told Baden-Baden Today.
Savrassov believes this has become
especially important for large countries with
various types of event exposures, and those
which are historically and geographically
positioned in ‘peak zones’, and could face a
sudden, devastating hit that could adversely
affect overall economy development.
“We have to admit that the speed of local
market development remains extremely slow in
terms of penetration. For example, 25 years of
insurance market free development brought an
average of only 2.5 percent penetration across
the entire Central and Eastern European (CEE)
region, with much lower figures for former
Soviet states,” he said.
However, he suggested the use of ILS
mechanisms could not only provide reliable
protection for governments to access much
faster disaster recovery financial protection, but
mechanisms brings unique advantages to local
governments, allowing rapid and effective response
to disaster consequences,” said Savrassov.
In terms of some of the losses seen in
the third quarter, he suggested these will be
learning events in the same way other notable
storms have been in the past.
“Even though estimates indicate that ILS
investors will absorb a digestible amount of
losses—albeit smaller than general reinsurers—
the whole ILS framework has been properly
stress-tested,” he said.
From an investor’s perspective, Savrassov
expects an inflow of new alternative capital
that would want to capitalise on post-event rate
“For prices, there is a naturally expected
healthy hike, which is determined by overall
expectations of the reinsurance market as well
as essential demand from ILS players to get a
fair payback for their commitments to losses,”
“In our opinion, the ILS sector demonstrates
real maturity and could be considered as one
of the key trends for capital and reinsurance
markets convergence and one of the future
faces for catastrophic risk protection.” n
also help to resolve the issue of low penetration
and overall underinsurance.
This year there have been a number of
examples of how parametric mechanisms can
work, and in particular they have proved how
quick settlements can be, Savrassov explained.
He cited the Caribbean Catastrophe Risk
Insurance Facility paying out for Irma and
Maria as well as Mexico’s Fund for Natural
Disasters (Fonden) and its response to the
magnitude 8.1 Chiapas earthquake.
“Needless to say, fast access to relief finance
with transparent, fair and well-defined trigger
Know your exposures before you talk price
The re/insurance industry should never
talk about pricing without first thoroughly
understanding its exposures, Suki Basi, managing
director of Russell Group, told Baden-Baden Today.
Basi explained that the industry must learn
from some of the recent events and capture
what otherwise had not been captured.
“If you look at Hurricane Harvey for
example, there was a huge spike in motor
claims, as many cars had been flooded. In a big
cat loss no-one would actually expect for there
to have been a big motor loss,” he said.
“The industry is writing the business. Surely
the industry must know what percentage of
motor business is transacted. That points to
information that is lost within an enterprise,
because business is lost in silos.
“The cat silo doesn’t ask the motor silo ‘how
much you have written in this space?’. Maybe it
should—the whole thing is connected anyway.”
Basi believes it is a good climate from his
perspective as people are starting to question
their exposures and attempting to understand
their numbers more. They want more
transparency and detail.
Market participants are starting to talk more
about their exposures and are having in-depth
discussions about pricing, and reinsurers are
starting to convince others that pricing levels
are not adequate, Basi stated.
He also stressed the importance of
understanding the relationship between
exposure, price and capital utilisation.
“For every dollar of exposure I am taking,
what is the effect on my margin of capital, and
what is the effect on price? Sometimes, I may
actually want to diversify. I’m still using the
same capital,” he said.
“Even in the current soft marketplace, the clever
people are writing profitable lines of business.”
In the past, Basi suggested, people wrote
loss of specialty on the back of cat in order
to diversify away from it, which he believes is
becoming more commoditised.
“A lot of people are writing specialty now,
which unfortunately drove the pricing down.
That was true then, but even now you can
switch between D&O and E&O, for example.
“That level of concentration of the portfolio
into different types of risk is a lot of what is
going on and what people have been using to
gain profitability in the soft market.
“As things harden, we would still like to have
that similar discipline but at the right pricing
level,” he concluded. n
10 | BADEN-BADEN TODAY | DAY 3: Wednesday October 25 2017 www.intelligentinsurer.com | www.bermudareinsurancemagazine.com