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Insurance-linked securities a viable alternative to reinsurance: IASA speakers


INDIANAPOLIS — The market for insurance-linked securities continues to evolve and offer insurers an increasingly viable alternative to traditional reinsurance, speakers said Wednesday at the Insurance Accounting & Systems Association Inc.'s Educational Conference and Business Show.

John Tholen, Cincinnati-based vice president of reinsurance for Great American Insurance Co., said his company recently structured a catastrophe bond for the first time. The bond, known as Riverfront Re Ltd., was issued in March and will cover Great American for catastrophe exposures for three years on a per-occurrence basis from an attachment point of $100 million up to an exhaustion point of $200 million, he said.

During a panel discussion on insurance-linked securities, Mr. Tholen said that foremost among the factors that convinced Great American to issue the bond was the fact that it was fully collateralized.

“For us, it was the collateral,” he said, noting that the deep pockets of typical ILS investors such as pension funds potentially enable larger limits than are possible in the traditional reinsurance markets.

Mr. Tholen said his company will continue to cede exposures under $100 million to its traditional reinsurance partners while using catastrophe bonds on larger exposures.

Fellow panelist Dan Knipe, London-based life portfolio manager at investment management firm Leadenhall Capital Partners L.L.P., said the alternative capital entering the reinsurance market complements rather supplants traditional reinsurance in many cases.

Catastrophe bonds work best on low-probability, high-severity risks, while the working knowledge of traditional reinsurers gives them an advantage on the more frequent risks, he said. “Our investors don't mind paying out on large hurricane losses, but don't want to be bothered by a claim resulting from somebody's roof falling in,” he said.

Mr. Tholen said that other trends boosting the attractiveness of catastrophe bonds include the shift toward indemnity-based triggers and a larger role for reinsurance brokers in structuring deals.

“The direct model doesn't work as well as it did,” Mr. Tholen said. “We see the broker model as more efficient.”