Issue 07 / October 2015
The catastrophe (cat) bond market emerged in the mid-1990s in an effort to expand and diversify the ability of primary insurers to transfer peak insurance risks, such as hurricanes in Florida and earthquakes in California and Japan.
Alternatives to traditional reinsurance will become even more prevalent in future.
The objective was to attract new, non-traditional capital willing and able to absorb peak insurance risk uncorrelated to their existing portfolios while seeking favourable returns.
Cat bonds can present an attractive alternative to traditional reinsurance, providing access to much larger risk-bearing capacity suitable for large-scale catastrophic events, the ability to structure multi-year protection at a fixed price, contractual certainty and fast pay-out time after a predefined event.
Cat bonds were the primary initial vehicle to attract this alternative capital, but over time a variety of other vehicles were developed, including collateralised reinsurance, industry loss warranties (ILWs) and reinsurance ‘sidecars’.
Becoming more widespread as companies retain more risk and traditional insurance struggles to cover emerging riskshttp://www.resilience.willis.com/articles/2015/09/29/why-alternative-risk-transfer-entering-mainstream/
Collateralised reinsurance involves contracts or programmes where investors or a third party provides collateral to cover the full potential of claims that could arise from the contract or programme.
ILWs are a reinsurance derivative contract where one party purchases protection based on total loss due to a catastrophic event that would impact the entire insurance industry rather than its own losses.
Each vehicle has specific advantages, differences and clientele, but each permits a non-insurance entity (such as a pension fund) to assume insurance risk in return for payments from the party ceding the risk, which provides multiple alternative avenues for risk to be packaged, housed and financed.
The observable trends suggest that these alternatives to traditional reinsurance will become even more prevalent in the coming years as increasing usage of alternative capital and development of new structures continues.
Catastrophe risk is dominant at the moment due to the lack of other risks being securitised, but many market participants also expect the market to open for new risk types in the coming years. This will continue to change the insurance industry landscape and further place ART in the mainstream.
Ciarán has worked within the Captive Insurance space for over 10 years. He is responsible for the execution of captive and risk financing consultancy projects, such as captive feasibility studies, captive optimisation reviews and Solvency II consulting. He joined Willis in 2013 having previously spent several years with Ernst & Young, specialising in management of large scale projects for insurance clients.
Willis Group Holdings plc is a leading global risk advisor, insurance and reinsurance broker. With roots dating to 1828, Willis operates today on every continent with more than 18,000 employees in over 400 offices. Willis offers its clients superior expertise, teamwork, innovation and market-leading products and professional services in risk management and transfer. Our experts rank among the world’s leading authorities on analytics, modelling and mitigation strategies at the intersection of global commerce and extreme events.Find more information at our website, www.willis.com
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