CAT Securitizations in 2003 Reveal Increased Innovation, Modest Growth in Volume

Risk Management Solutions (RMS), a provider of products and services for the management of catastrophe risk, has completed a review of catastrophe securitizations that were placed in 2003.

Considering publicly available sources, the firm estimated that approximately $1.8 billion of catastrophe-linked securities were placed in 2003. Of note was the trend toward innovative transactions that cover new catastrophe perils or new types of insurance risk.

Catastrophe bonds constitute a very small part of the securitization business. They are also surpassed by traditional reinsurance as a source of capital to cover catastrophe risks such as natural hazards.

That said, the pace of innovation within this niche increased in 2003 with the completion of three deals that addressed new types of risk:
Golden Goal Finance Ltd covers cancellation of the 18th FIFA World Cup™ scheduled to be held in the summer of 2006 in Germany. This was the first securitization to cover terrorism risk, in addition to natural perils. It was also the first to cover risk to a sports event.
Vita Capital Ltd, issued on behalf of Swiss Re, covers catastrophic increases in mortality rates in the U.S., U.K., France, Switzerland, and Italy. The catastrophe-indexed notes are linked to a rise in mortality from any source, including epidemics, natural disasters, war, or terrorist attacks. This was the first insurance-linked security relating to life insurance risk.

The most recent securitization deal, which was placed in late December, is the Pylon Ltd securitization, covering damage from windstorm for a major European electricity supplier. This was the first securitization to cover transmission and distribution (T&D) risk, and the first for a European corporate.

Since 1999, catastrophe securitization volumes have averaged about $1 billion each year. The increase in 2003 to $1.8 billion was driven by a larger average transaction size, with the total number of transactions remaining flat. Of the seven deals publicized during 2003, RMS provided the risk analysis for three, including Golden Goal Finance Ltd., Pylon Ltd, and Formosa Re, a securitization of earthquake risk by the Taiwan Residential Earthquake Insurance Pool. These three deals accounted for a total issuance of approximately $600 million.

“The innovative securitizations seen in 2003 demonstrate that new perils and lines of business can be effectively quantified for investment purposes, and that the capital markets are willing to provide alternative financial coverage,” said Dr. Gordon Woo, RMS risk consultant. “RMS models and analysis have been driving the recent trend toward innovation, and will continue to facilitate the broadening of the risks that can be securitized in the future.”