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Catastrophe Securitization: Market Update

Catastrophe Securitization: Market Update. 2002 CAS Special Interest Seminar on Catastrophe Risk Management October 7, 2002. Catastrophe Securitization General Market Characteristics Today. Market Size Transaction Size Issuers & Investors Perils & Territories.

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Catastrophe Securitization: Market Update

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  1. Catastrophe Securitization:Market Update 2002 CAS Special Interest Seminar on Catastrophe Risk Management October 7, 2002

  2. Catastrophe SecuritizationGeneral Market Characteristics Today • Market Size • Transaction Size • Issuers & Investors • Perils & Territories

  3. Catastrophe SecuritizationMarket History • First issuance in 1994 • Multiple issuances began in 1997 • 45 Cat Risk Transactions • $6.02 Billion in total issuance

  4. Catastrophe SecuritizationMarket Size - Transactions & Issuance

  5. Catastrophe SecuritizationCat Bond “Sweet Spot” • “Supercats” - EL < 1:100 • Est. market < $3bn • $1.8bn in outstanding bonds with EL < 1:100 • Why? • Counterparty Credit Risk • Minimum Capacity Charges

  6. Catastrophe SecuritizationTransaction Size

  7. Catastrophe SecuritizationSponsors & Investors • Sponsorship of transactions includes: • Allianz, AGF, CEA, Gerling, Kemper, Mitsui, USAA , State Farm, Tokio, Winterthur, XL Capital, Yasuda, Zurich • AXA Re, Hannover Re, Munich Re, Scor, St. Paul Re, Swiss Re • Investors include: • Reinsurers, Insurers, Banks, Investment Advisors/Mutual Funds, Hedge/ Proprietary Funds

  8. Catastrophe SecuritizationPerils & Territories Covered *Represents those cat bonds exposed to Midwest Earthquake, US Northeast Hurricane, Monaco Earthquake, Puerto Rico Hurricane, Europe Hail and Hawaii Hurricane. **The entire principal of multi-peril bonds, where the full principal is exposed, was allocated to applicable perils.

  9. Catastrophe SecuritizationCat Bond Structures • Term • Triggers • Single vs Multi Peril

  10. Catastrophe SecuritizationTenor of Cat Bonds Issued

  11. Catastrophe SecuritizationWhy generally a 3-year term? • Issuer • Lock in capacity at a fix cost over a multi-year period • Amortize substantial set up costs • Investor • Balance between liquidity risk (if too long) and re-investment risk (if too short)

  12. Catastrophe SecuritizationTriggers

  13. Catastrophe SecuritizationSingle-Peril vs Multi-Peril

  14. Catastrophe SecuritizationConclusion - Current Characteristics • Low loss probability • annual expected losses between 0.2% and 1.0% • reduced investor interest for higher probabilities • Quantifiable risks • indemnity transactions • tied to an index • PCS • parametric or notational index • Large capacity needs • > $100MM issuance • upward pricing pressure on issuer for issues <$100MM • Limited number of peak risks • ideally single peril and single territory • multi-peril and multi-territory risks are feasible, but more expensive

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