Reinsurance Focus

Those interested in alternative risk transfer mechanisms, including captives, cat reinsurance, and weather risks may be interested in a web site dealing with such issues, Artemis. Artemis has been updated to include new headlines and other information. The home page features news headlines, and the site also includes sections with background information on covered topics, a deal directory listing alternative risk transfer transactions and an events calendar. The site also sponsors a blog relating to alternative risk transfer topics, which we are adding to the links section of Reinsurance Focus.

This post written by Rollie Goss.

Three articles were recently published in law reviews and journals relating to reinsurance:

• Health care reform – In The Present and Future of Government-Funded Reinsurance, 51 St. Louis U. L. J. 369 (Winter 2007), John Jacobi, a professor at Seton Hall Law School, contends that government-funded reinsurance could play a valuable role in incremental health care reform.
• Reinsurance intermediaries – In Reinsurance Intermediaries: law and litigation, 29 U. Haw. L. Rev. 59 (Winter 2006), Douglas Richmond, a Senior Vice President with Aon Risk Services, analyzes the duties and potential liabilities of reinsurance intermediaries using fairly traditional agency concepts.
• Hedge funds – In The Utility of Hedge Funds: an alternative to traditional reinsurance, 49 For The Defense 32 (April 2007), practitioners James Somers and Katie Lewis Bordeau offer a general description of the participation of hedge funds in the reinsurance market. Although the title of the article describes hedge funds as an “alternative” to reinsurance, the text really describes hedge funds as a source of capital for vehicles such as side cars.

The UK's Financial Services Authority (“FSA”) has adopted regulations to implement portions of the European Union's Reinsurance Directive that are designed in part to facilitate the expedited formation and management of special-purpose vehicles, which may be used for securitizations or other forms of alternative risk transfer arrangements. The proposals were described in a Consultation Paper, CP06/12, Implementing the Reinsurance Directive, which was published in June 2006 with a summary and a description of the Consultation Paper in a newsletter publication. A comment period followed. Rules were adopted by the FSA effective December 31, 2006. Special-purpose vehicle Rules and Guidelines may be found in the FSA's Handbook.

Allianz Global Corporate & Specialty has issued a $150 million cat bond to transfer the risks of severe river floods in Great Britain and earthquakes in Canada and the United States (excluding California). See various descriptions of this bond. This is believed to be the first cat bond covering flood risks, and was written on a parametric basis, using a model prepared by Risk Management Solutions. This is the first bond issued using Blue Wings Ltd., a Cayman Islands-based special purpose vehicle, and is intended to be the first part of a $1 billion program.

Apart from legislative activity in the area of cat funds and cat risk reinsurance, there have been three recent items of interest with respect to alternative reinsurance arrangements:

• Hanover Re, which has been very active in securitizing reinsurance risks, has securitized reinsurance recoverables valued at approximately $1 billion, to accelerate the cash flow in that area;
• The World Bank has created a regional catastrophe risk insurance pool that is currently covering 18 Caribbean countries. Two press releases describe the pool and the initial funding for the pool, which will purchase reinsurance in the private market. A detailed report available at the World Bank's Internet site provides additional detail;
• Guy Carpenter & Company and MMC Securities Corp. has issued a detailed report titled The Catastrophe Bond Market at Year-End 2006, providing an annual review of the catastrophe bond market and an update on bond transaction activity and market dynamics. It provides interesting descriptions of different kinds of alternative risk transfer mechanisms, such as catastrohe bonds, side cars, and extreme mortality transactions, with listings of transactions in each category.

Hannover Re has issued a $160 million securitization of catastrophe risks. Hannover described the issue as the completion of its “K3″ transaction, being composed of a variety of non-proportional reinsurance of natural perils (hurricanes and earthquakes in the United States, windstorms in Europe and earthquakes in Japan) and worldwide aviation business.

In an interesting form of alternative risk transfer, the Chicago Mercantile Exchange announced that it will commence trading Hurricane index futures and options contracts to hedge hurricane risks. A press release describes the financial instruments generally, while a separate page on the CME’s web site provides more detailed information. At about the same time, the New York Mercantile Exchange announced plans to trade futures contracts based upon the risk of catastrophic property damage from natural disasters. Weather futures are now traded on the Chicago Board of Trade, a NYMEX company. The two exchanges will trade somewhat different types of contracts, based upon different risks. It will be interesting to see what effect, if any, these offerings have on the reinsurance market.

Tokio Marine & Nichido Fire Insurance Co. has arranged reinsurance cover for approximately $200 million of typhoon risks by means of a securitization. Swiss Re accepted reinsurance of the risks and transferred the risks to a special purpose Cayman Islands company which issued the securities. The five year, BB+ rated securities transaction was designed and sold with the assistance of SwissRe Capital Markets Corporation.

Artemis describes iteself as “the Alternative Risk Transfer Portal.” It contains a directory describing numerous alternative risk transfer financing transactions, and provides visitors with an oportunity to subscribe to a news feed of alternative risk transfer deals.

Endurance Specialty Insurance Ltd. (“Endurance”) has acquired $235 million of protection for California earthquake and U.S. hurricane risks, financed through a risk-linked securities program. Endurance, a unit of Bermuda-based Endurance Specialty Holdings Ltd., bought the coverage from Cayman Islands-based Shackleton Re Ltd. Shackleton Re financed the reinsurance through the issuance of a $125 million catastrophe bond and a $110 million multi-year risk-linked credit facility. Endurance’s new reinsurance program has three separate layers of coverage, including: $125 million of reinsurance to cover California earthquake risk for 18 months; $60 million of coverage for U.S. hurricanes in the North Atlantic, Gulf Coast, and certain inland regions for two years; and $50 million of reinsurance for California earthquake or U.S. hurricane losses, occurring within a year of a similar catastrophe, for two years.