The case for non-CAT property insurance-linked securities

Consistent with how the ILS market evolved risk transfer for catastrophe (CAT) risk, a “win-win” scenario exists for non-CAT property lines as carriers are able to diversify their sources of capital and investors can take advantage of a larger pool of risk that is not correlated with the financial markets. (Credit: Jirapong/Adobe Stock)

The size of the global property insurance market is estimated to be $450 billion by annual premium, but only a small fraction of this exposure makes its way into the insurance-linked securities (ILS) market. Capital markets investors are missing the expected return and potential diversification benefits from a large swathe of the property insurance market. Consistent with how the ILS market evolved risk transfer for catastrophe (CAT) risk, a “win-win” scenario exists for non-CAT property lines as carriers are able to diversify their sources of capital and investors can take advantage of a larger pool of risk that is not correlated with the financial markets.

Non-CAT property is a slight misnomer as these insurance and reinsurance covers are exposed to natural catastrophe losses, albeit at a much smaller scale. Non-CAT covers are primarily designed to absorb losses from non-systemic events such as fire impacting a single risk. These covers will also respond to localized weather events such as severe convective storms and inland floods impacting a limited geography. The systemic risk is placed with the catastrophe market. Reinsurers will typically segment their property line of business between CAT and non-CAT; the latter may be referenced as “property non-CAT” or “other property” and will include quota share and excess of loss products.