Capital markets capacity continues to innovate as highlighted by the recent issuance of a catastrophe bond by the MTA . This issue, MetroCat, which came to market in July 2013, demonstrated the willingness of capital markets investors to assume storm surge and flood risk from named storms in a cost effective manner.
Additionally, GC Securities‘ recent private catastrophe placement from the World Bank’s new catastrophe note facility for the Caribbean Catastrophe Risk Insurance Facility (CCRIF) shows the application for those sovereigns that need to protect against natural risks but whose limit needs may be more modest. The CCRIF private placement also highlights the willingness of investors to evaluate and assume risk based on alternative models as opposed to only the large vendor models. We believe this development will open up further opportunities for both perils and geographic regions where large vendor models are not available.
Following the success of MetroCat, the application of capital markets capacity to corporate clients has emerged as a growing trend. In the wake of Superstorm Sandy, many corporate clients faced difficult post-event renewal cycles for storm surge risks, as well as business interruption and contingent business interruption-type losses. Many of these clients also came to the realization that they were exposed and retained significant unreinsured risks. Companies in this situation are increasingly evaluating and utilizing capital markets-based risk transfer solutions, including catastrophe bonds and collateralized reinsurance, given their increasing cost-effectiveness and simplified processes. GC Securities expects substantial growth and activity in this area through 2015.
Finally, there is a growing message from insurers and reinsurers regarding how capital markets-based risk transfer capacity can be utilized to segment certain risks that are best suited for the capital markets. There is also interest in how they can utilize and rely upon this form of capital on a longer-term basis as a substitute for equity capital.
Up to this point insurers and reinsurers have relied upon capital markets-based capacity primarily for property catastrophe risks (either for existing business or for growth into new areas). Moving forward, there is a question of the degree of expansion into longer tail, less volatile insurer lines given the growing prevalence of hedge-fund backed reinsurers seeking to reinsure asset intensive long-tail liabilities. With the dialogue just beginning at the C-suite level, further innovations are a matter of when…not if.
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