Supply and demand on track for new European corporate risk ART market

The capital markets are ready and willing to tap into this potential new demand as the traditional catastrophe bond and ILS markets mature and appreciation of the potential offered by this uncorrelated risk by the likes of pension and hedge funds grows. Financial centres such as Malta have recently enacted legislation needed to create reinsurance special purpose vehicles and innovative cell captives to turn this potential into reality on a Europe-wide basis. Europe's risk and insurance managers need to take a closer look at the options before they renew their standard programmes. Dr Alan Punter, visiting professor at Cass Business School in the UK and former head of Aon's capital market's operation, said that some 25 of the 500 or so catastrophe bond deals closed to date have been for corporations. There is also rising interest in such structures by government entities such as the bond issued last year for the Turkish catastrophe pool.hideDr Punter said that in the majority of these cases the trigger was parametric rather than traditional indemnity. Parametric triggers are quicker, cleaner and do not lead to the long drawn out legal battles that complex indemnity contracts can generate in the traditional insurance market, he added. Dr Punter has argued for some time that corporate risk and insurance managers should look more closely at the options offered by capital markets because of a fundamental difference between the way they and insurers typically look at claims. "Corporate insurance buyers are concerned about impact and insurance companies are concerned about cause. There is a link between cause and impact of course, but it is more tricky than it used to be. In the past you lost an oil rig and you needed a new one and nothing more. The rise of intangible risk brings a new dimension and is the key thing here," Mr Punter told Ferma delegates. "I have seen a number of cat bonds issued by corporates and yes the impact of the event on the corporation may not be best dealt with by indemnity-based contracts and parametric would be better," he added. Dr Punter gave an example of one of the catastrophe bonds issued for corporates. It was the first, called Concentric Re, that provided non-damage business interruption (NDBI) cover for a theme park in Tokyo. The cover was triggered when an earthquake occurred. The payout was parametric rather than indemnity-based and depended upon the scale of the quake within specific zones measured by the Japanese earthquake agency (JMA). Given the high demand among corporate risk managers for NDBI solutions and relative inability of the traditional market to respond, this kind of structure offers an interesting opportunity, argued Dr Punter. "Concentric Re covers NDBI and I am not sure how easy it is to get good cover for that. The parametric trigger is clear. If you asked an underwriter to calculate the probability of an earthquake, the damage, how long it would take to rebuild the airport and consequent impact on the park...that would be impossible," he said. Dr Punter pointed out that such structures can also plug capacity gaps in more traditional lines. Fifa, for example, used a bond to provide its major event cancellation coverage after the terror attacks on the World Trade Centre because the standard market simply walked away. Investors are definitely looking to expand the traditional catastrophe risks they cover. "The relative growth in the catastrophe bond market has slackened," said Dr Punter. "Growth is more in collateralised reinsurance and investors are looking further down the spectrum for higher returns in more specialised areas such as marine, aviation and the like. AIG has issued bonds that cover multiple risks on an aggregate basis. These are not single peril structures. This is more like treaty reinsurance than catastrophe bonds," he added. Dr Punter was not the only expert at the Ferma Seminar who sees potential in the corporate market. Steve Britton, managing director, global ILS management at Aon Captive & Insurance Management (ACIM), said: "Exciting things are happening in this field. You can buy insurance protection per square metre based on temperature, flood and the like. We will see more corporate deals done such as that recently by Amtrak in the US." Mr Britton pointed out, however, that the potential is limited by the models available to support such innovative structures and long tail risks. "One thing that is restraining expansion into new areas is the lack of models. There is also the longevity of the risk, casualty risks can be 20 year risks. This is a problem. But people are working on this," he explained. Investors are definitely interested in new options, according to Ulrich Beck, executive director, sourcing at Twelve Capital, the investment management firm for institutional investors that has provided some $3.5bn in assets for the $75bn of cat bonds and ILS deals done to date. "Originally cat bonds were for US wind, Japanese earthquake and the like but there is only so much catastrophe risk supply. Despite falling prices [in the ILS market] we have therefore seen a shift to the ILS market and increasingly private not listed [deals]. This allows the placement of insurance risk directly with investors. The costs are lower, there are less legal fees and the like. This becomes attractive and we have seen a movement into areas such as aviation, crop, fire and marine. Private ILS could be the future if it is regulated correctly," said Mr Beck.

Supply and demand on track for new European corporate risk ART market

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