Derivatives in re/insurance

27-04-2015

Derivatives in re/insurance

Henning Ludolphs, managing director of retrocessions and capital markets at Hannover Re, talks indemnity vs parametric triggers in his first ILS blog.

Corporates and re/insurance companies prefer to use indemnity triggers when it comes to buying re/insurance. This is logical as re/insurers have to pay actual losses to their clients and hence want to recover from their reinsurers or retrocessionnaires likewise.

ILS-investors and in particular those focusing on the catastrophe bond market generally prefer non-indemnity triggers, e.g. triggers based on indices or parameters. Such triggers are more transparent and (sometimes) easy to understand, for example when reference is made only to the strength of an earthquake and the location of its epicenter. Also the way re/insurers work and think, i.e. trust that the client will deliver accurate loss information, is new to some investors who enter the re/insurance market.

Nevertheless, over recent years more and more catastrophe bonds coming to market are based on indemnity triggers. This is explained by supply and demand mechanism. Demand from investors’ side is very strong and hence issuers of catastrophe bonds are able to structure the bonds the way they prefer. Years ago as a rule of thumb it was said that ‘the price for a catastrophe bond with indemnity trigger is half a percentage higher than one without indemnity trigger’. This is basically gone.


Hannover Re, ILS, Henning Ludophs, Derivatives

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