Businessman pointing to word innovation against spiral of shiny“Cat bond lite” transactions are enjoying a big growth spurt, and a new industry report said insurers and reinsurers stand to gain by becoming more familiar with how they work.

“The rapid growth in adoption of the cat bond lite structure suggests that the speed, flexibility and tactical benefits are resonating with the insurance linked securities community,” the Property Claim Services unit of Verisk Insurance Solutions concluded in its report. “The relatively small amounts of risk transferred through cat bond lite transactions could attract new participants, risk-bearer types and regions.”

Cat bond lite refers to a streamlined approach to securitized risk transfer that is cheaper than conventional cat bonds and typically involves securitization of a collateralized reinsurance contract or underlying loss warranty, Tom Johansmeyer, assistant vice president of reinsurance services/marketing for ISO/Verisk, wrote previously. They generally involve private cat bonds. Johansmeyer is the author of the new PCS/Verisk report, entitled “Seven Important Reasons to Understand ‘Cat Bond Lite.'”

PCS/Verisk said in January that cat bond lite issuance in 2015 included $490 million in new limits from 16 transactions, more than double the $242 million in publicly revealed cat bond lites in 2014. The firm said in its latest report that the concept had its breakout year in 2014, with rapid expansion again in 2015.

“If the current trend continues, cat bond lite could become an important risk and capital management tool for the ILS sector,” the report noted.

Cat bond lite transactions have a number of benefits, according to the report. Among them:

  • They can be completed quickly, with execution in as few as 10 days once the risk piece is in place.
  • The transactions are flexible, PCS/Verisk asserts, as risk bearers can use these bonds to allocate capitol, lay of risk and rebalance their exposures with greater control. The alternative: the secondary market or new issuance pipeline.
  • They are liquid instruments, listed on a stock exchange, and tradable. This reality – that cat bond lite transactions are securitized – can help attract sources of capital and also facilitate secondary trading later on.
  • Cat bond lite structures are streamlined, with low frictional costs, versus public catastrophe bonds that can be expensive to complete.
  • The growth of cat bond lite could allow for new players to enter the market.
  • There could be new risk-bearer types down the line, beyond the fund-to-fund transactions currently dominating cat bond lite.

There’s new market potential here. PCS/Verisk said that insurers and reinsurers in areas with smaller risk transfer requirement that have an interest in the benefits of securitization could access capital markets capacity via cat bond lite.

Source: PCS/Verisk