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Catastrophe Securitization: Market Update. 2002 CAS Special Interest Seminar on Catastrophe Risk Management October 7, 2002. Catastrophe Securitization General Market Characteristics Today. Market Size Transaction Size Issuers & Investors Perils & Territories.

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catastrophe securitization market update

Catastrophe Securitization:Market Update

2002 CAS Special Interest Seminar on

Catastrophe Risk Management

October 7, 2002

catastrophe securitization general market characteristics today
Catastrophe SecuritizationGeneral Market Characteristics Today
  • Market Size
  • Transaction Size
  • Issuers & Investors
  • Perils & Territories
catastrophe securitization market history
Catastrophe SecuritizationMarket History
  • First issuance in 1994
  • Multiple issuances began in 1997
  • 45 Cat Risk Transactions
  • $6.02 Billion in total issuance
catastrophe securitization cat bond sweet spot
Catastrophe SecuritizationCat Bond “Sweet Spot”
  • “Supercats” - EL < 1:100
    • Est. market < $3bn
    • $1.8bn in outstanding bonds with EL < 1:100
  • Why?
    • Counterparty Credit Risk
    • Minimum Capacity Charges
catastrophe securitization sponsors investors
Catastrophe SecuritizationSponsors & Investors
  • Sponsorship of transactions includes:
    • Allianz, AGF, CEA, Gerling, Kemper, Mitsui, USAA , State Farm, Tokio, Winterthur, XL Capital, Yasuda, Zurich
    • AXA Re, Hannover Re, Munich Re, Scor, St. Paul Re, Swiss Re
  • Investors include:
    • Reinsurers, Insurers, Banks, Investment Advisors/Mutual Funds, Hedge/ Proprietary Funds
catastrophe securitization perils territories covered
Catastrophe SecuritizationPerils & Territories Covered

*Represents those cat bonds exposed to Midwest Earthquake, US Northeast Hurricane, Monaco Earthquake, Puerto Rico Hurricane,

Europe Hail and Hawaii Hurricane.

**The entire principal of multi-peril bonds, where the full principal is exposed, was allocated to applicable perils.

catastrophe securitization cat bond structures
Catastrophe SecuritizationCat Bond Structures
  • Term
  • Triggers
  • Single vs Multi Peril
catastrophe securitization why generally a 3 year term
Catastrophe SecuritizationWhy generally a 3-year term?
  • Issuer
    • Lock in capacity at a fix cost over a multi-year period
    • Amortize substantial set up costs
  • Investor
    • Balance between liquidity risk (if too long) and re-investment risk (if too short)
slide14

Catastrophe SecuritizationConclusion - Current Characteristics

  • Low loss probability
    • annual expected losses between 0.2% and 1.0%
    • reduced investor interest for higher probabilities
  • Quantifiable risks
    • indemnity transactions
    • tied to an index
      • PCS
      • parametric or notational index
  • Large capacity needs
    • > $100MM issuance
    • upward pricing pressure on issuer for issues <$100MM
  • Limited number of peak risks
    • ideally single peril and single territory
    • multi-peril and multi-territory risks are feasible, but more expensive