Cat Bonds Now Cover Terrorism, Sports

NU Online News Service, Feb. 6, 3 :17 p.m.EST

The report came from Risk Management Solutions in Newark Calif.,a global catastrophe risk management products and servicesprovider.

Catastrophe bonds are sold by reinsurers, insurers, or a poolingentity, directly or indirectly to third-party investors to raisecash and provide a form of reinsurance spread the risk and pay forcatastrophe losses.

RMS said that based on a review of catastrophe securitizationsusing publicly available sources an estimated $1.8 billion in catsecurities were placed in 2003

Catastrophe bonds, the firm said, constitute a very small partof the securitization business, being surpassed by traditionalreinsurance as a source of capital to cover natural-hazardcatastrophe risks.

However, RMS said that the pace of innovation within this nicheincreased in 2003 with the completion of three deals that addressednew types of risk.

The company noted the Golden Goal Finance Ltd. coverage againstcancellation of the 18th FIFA World Cup scheduled to be held in thesummer of 2006 in Germany. The coverage for the internationalsoccer tournament, RMS said, was the first securitization to coverterrorism risk, in addition to natural perils. It was also thefirst to cover risk to a sporting event, according to thecompany.

RMS also reported that RMS Vita Capital Ltd, issued on behalf ofSwiss Re, covers catastrophic increases in mortality rates in theU.S., U.K., France, Switzerland, and Italy.

The catastrophe-indexed notes are linked to a rise in mortalityfrom any source, including epidemics, natural disasters, war, orterrorist attacks. This was the first insurance-linked securityrelating to life insurance risk, RMS said.

According to the firm, the most recent securitization deal,placed in late December, saw Pylon Ltd. securitize damage fromwindstorm for a major European electricity supplier. This was thefirst securitization to cover transmission and distribution risk,and the first for a European corporate, RMS said.

By RMS's count, catastrophe securitization volumes since 1999have averaged about $1 billion each year. RMS said a volumeincrease in 2003 to $1.8 billion was driven by a larger averagetransaction size, with the total number of transactions remainingflat.

Of the seven deals made public during 2003, RMS said it providedthe risk analysis for three, including Golden Goal Finance Ltd.,Pylon Ltd, and Formosa Re, a securitization of earthquake risk bythe Taiwan Residential Earthquake Insurance Pool. RMS said thosethree deals totaled about $600 million.

Gordon Woo, an RMS risk consultant, said that "the innovativesecuritizations seen in 2003 demonstrate that new perils and linesof business can be effectively quantified for investment purposes,and that the capital markets are willing to provide alternativefinancial coverage."

More than 400 insurers, reinsurers, trading companies, and otherfinancial institutions use RMS models to quantify, manage, andtransfer risk, the company said. More information is available online at www.rms.com.