First ‘cat in the box’ deal by Israeli insurer

Israeli insurer Israel Direct Insurance (IDI) has completed an innovative first of its kind cat bond deal using a parametric trigger facilitating protection against earthquake losses.

The $14 million deal, which provides earthquake coverage on an annual basis for IDI, was facilitated by Aon Benfield Securities and structured by Munich Re.

The use of the parametric trigger means that losses can be calculated quickly based on the severity of the catastrophe – rather than the actual losses incurred by IDI – and payments made quickly. Set boundaries have also been set within which a qualifying event must occur. This has led to phrase ‘cat in a box’ being coined to describe the structure of deal.

Steven Kostyn, vice president of risk and reinsurance at IDI, said: “We are very happy with the solvency-related value of the coverage secured via this parametric transaction, which provides protection not only for standard insurance risks but also for the wider financial and operational risks to an insurance company involved in an earthquake event.”

Paul Schultz, CEO of Aon Benfield Securities, said: “We are pleased to have arranged the first Cat in the Box parametric contract for an Israeli insurance company.  We believe this creates new opportunities for clients in the Israeli market and we greatly appreciate the collaboration with IDI and with Munich Re in bringing this first deal to a successful conclusion."

Andreas Pollmann, client management executive at Munich Re, said: “Munich Re is pleased to be the risk carrier for this transaction with IDI demonstrating the ability and commitment to complement traditional reinsurance with innovative and sophisticated solutions also to the Israeli insurance market. The realization of this transaction together with Aon Benfield Securities is another example of good cooperation for the benefit of the clients in the Israeli market.”

Aon Benfield’s Impact Forecasting team supported the transaction through the provision of catastrophe modelling solutions and expertise in catastrophe management.

Goran Trendafiloski, a catastrophe model developer within Impact Forecasting who specializes in the development of European earthquake models, said: “Impact Forecasting’s Israel earthquake model and catastrophe modelling platform ELEMENTS provides an up-to-date architecture to model clients’ data with the highest spatial and exposure resolution, thus contributing towards a more reliable estimation of IDI’s earthquake risk and its understanding and quantifying of the uncertainty. The transparency of the model’s technical details helped facilitate IDI’s decision to purchase this parametric cover.”