18 December 2014 Alternative Risk Transfer

Insurers of last resort opt for ILS market

Insurers of last resort are increasingly using the convergence markets to transfer some of their peak exposures to the capital markets, according to a report by AM Best.

Entities including insurers formed through Fair Access to Insurance Requirements (FAIR) plans, Beach/Windstorm plans as well as quasi state-run insurance companies have welcomed the availability of insurance-linked instruments, as exposures continue to grow via increased property values, AM Best said.

Despite depopulation of property policies by some of these entities, the ILS sector is providing a helpful bridge in reducing the cost of reinsurance.

According to the rating agency, approximately $5.6 billion of catastrophe bonds have been issued by seven of these entities from 2009 through Sept. 30, 2014. The two main perils are hurricane and earthquake, occurring in their respective regions. Hurricanes accounted for approximately $4.53 billion, or 81.2 percent, with earthquakes taking the other $1.05 billion, or 18.8 percent, for these entities during the period reviewed here.

These seven entities accounted for about 18 percent of the catastrophe bond issuance for property/casualty (P/C) related risk for the period studied. In 2012, approximately 23 percent of P/C related exposures of cat bond issuance were from these entities.

In 2014, Florida Citizens Insurance, the state-run insurer, sponsored the largest catastrophe bond ever at $1.5 billion.

“About $3.9 billion of the $21.2 billion of cat bonds that remained outstanding as of Sept. 30, 2014, were issued by these insurers of last resort,” said AM Best. “These statistics point to the growing use of the cat bond market as a mechanism to transfer peak exposures.”

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