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Catastrophe bonds and products with parametric triggers can be useful tools for risk managers to gain immediate access to capital in the event of a claim, a panel of experts said.
The use of catastrophe bonds, which many insurers have tapped as a source of alternative reinsurance capacity, is becoming a trend among corporate buyers, said Jamie Crystal, executive vice president of Crystal & Company in New York.
“A major trend with cat bonds is that they are starting to be used by corporates,” he said.
Investors are interested in buying cat bonds because the underlying risks is seen as uncorrelated with other investment risks and they typically offer satisfactory yields, Mr. Crystal said.
Cat bonds transfer a specific risk or set of risks, he said, and often contain parameters or triggers that define whether a loss will be paid, such as a named storm or an earthquake of a certain magnitude hitting a specific location.
Laureen Coyne, retired director of risk management at the Metropolitan Transportation Authority in New York, told attendees at the annual Risk & Insurance Management Society Inc. conference that a sudden lack of affordable insurance capacity following Superstorm Sandy prompted the MTA to examine the possibility of buying a cat bond.
In the aftermath of the 2012 storm, the MTA was faced with a loss of about $5 billion, and its insurance coverage did not come close to that amount while its rates nearly doubled, Ms. Coyne said.
That prompted the MTA to begin to explore cat bonds, resulting in the MetroCat Re Ltd. Series 2013-1, becoming the first to have storm surge as a peril.
The bond gave the MTA's captive “a fully collateralized source of multiyear reinsurance protection for storm surge risk” and contained a parametric trigger limited to named storms, she said.
An alternative to cat bonds, which because of the costs involved are most suitable for a transaction size of $100 million or more, are parametric insurance products, said Mr. Crystal.
While parametric insurance mimics many of the characteristics of cat bonds, the risk is borne by insurers rather than investors, he said.
Parametric insurance can provide buyers with ready access to capital immediately after a loss from perils such as a windstorm or earthquake, he said.
Buyers do not need to provide underwriting information as the insurer calculates the probability of a defined trigger event occurring, Mr. Crystal said, and payment is swift since no adjusters are required.
Reinsurers are pushing to create or expand their specialty and other insurance operations as ongoing competition dampens growth prospects in traditional reinsurance lines.