Cat bond lite - and an ideally short shelf life

21-01-2016

Cat bond lite - and an ideally short shelf life

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Tom Johansmeyer, AVP – Reinsurance Services, Marketing at ISO/Verisk Insurance Solutions takes a look at the cat bond lites, which are starting to play a big part in the ILS market.

A couple of years ago, private catastrophe bonds were exactly what the name indicates: private. In 2014, however, the rapid growth of the ‘cat bond lite’ market brought such transactions into the public eye, especially as the global reinsurance and insurance-linked securities (ILS) market began to see the bond’s utility in tactical risk and capital management. And growth continued. Rapidly. Last year, publicly revealed cat bond lite transactions doubled year on year. Although the fourth quarter ended without any issuance activity, the market had plenty of chatter to suggest continued momentum into 2016.

From quietly used and little known, cat bond lite has become one of the most interesting new developments in the ILS market. Still, many have yet to become familiar with this risk-transfer vehicle. And if industry innovation proceeds as planned, perhaps a new form of securitised risk and capital management will emerge with even greater efficiency. So, what is cat bond lite?

Simply put, cat bond lite is a securitised risk-transfer approach that is streamlined relative to the extensive overhead necessary for a full 144A catastrophe bond transaction. The underlying programs in cat bond lite use a wide range of triggers—including parametric, indemnity, and the PCS Catastrophe Loss Index—demonstrating the flexibility that the vehicle affords. In the case of index-triggered transactions, for example, a cat bond lite is basically an industry loss warranty (ILW) that’s been securitised.


ILS, cat bond lites, reinsurance, capital management

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