Guy Carpenter Launches ‘SelectCat’ Reinsurance Pricing & Loss Index

Guy Carpenter & Company, LLC, the risk and reinsurance specialist of the Marsh & McLennan Companies, has launched SelectCat, which it describes as “an innovative, index-based product that provides reinsurers with much needed capacity, flexibility and rational pricing for managing their property catastrophe risks.”

SelectCat features a “unique pricing and loss index,” developed from a “synthetic layer, structured for a basket of programs selected to act as a proxy for the portfolio that a reinsurer wants to protect,” said the announcement.

“After Hurricane Katrina, we recognized the need for a more proactive approach to securing capacity in the property retro market and began to look at new, index-based approaches,” explained David Priebe, Head of Guy Carpenter’s Specialty Operations. “Since the completion of our first SelectCat transaction in 2006, the response from the marketplace has been overwhelmingly positive, and it is now being used as a key hedging strategy by some of the world’s leading reinsurers. Though SelectCat was developed in response to hard market conditions, its innovative structure, superior exposure control and greater transparency make it a rational solution in all market cycles.”

The bulletin also notes that “SelectCat is useful for capital market providers, as well as the retrocessional specialty and the traditional reinsurer markets. Similar in concept to a Collateralized Debt Obligation (CDO), it allows retrocessional reinsurers and other capital providers to access portfolios of insurance risks that fit their risk appetite. By utilizing a portfolio approach that incorporates a number of programs, SelectCat greatly reduces the concentration and operational risk associated with writing a single catastrophe program.

“In addition, SelectCat offers retrocessional reinsurers and other capital markets providers the necessary flexibility to take on insurance risk in the post-Florida legislation era, and enables reinsurers to rebalance their risk profiles rather than offload risks proportionally.”

“Conventional wisdom has dictated that retrocession comes with a high degree of uncertainty and that buyers ought to pay much higher — sometimes irrationally higher — prices to compensate for this uncertainty,” Priebe added. “SelectCat proves that adopting a customized, index approach, if structured and analyzed properly, can produce more predictable results than an individual program. Though many reinsurers will continue to opt for traditional retrocessional insurance, in today’s competitive marketplace where options are limited and the pricing environment is challenging, SelectCat is an exciting new breakthrough that raises the bar for index-based protection.”