Cat bonds key to closing protection gap

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Sponsoring transparent and understandable cat bonds—including bonds that use parametric triggers—could become one of the most effective risk transfer instruments for emerging economies to resolve the developing issue of the protection gap at the macro level, Kirill Savrassov, CEO of Phoenix CRetro, a niche Bermudian ILS specialist, told Baden-Baden Today.

Savrassov believes this has become especially important for large countries with various types of event exposures, and those which are historically and geographically positioned in ‘peak zones’, and could face a sudden, devastating hit that could adversely affect overall economy development.

“We have to admit that the speed of local market development remains extremely slow in terms of penetration. For example, 25 years of insurance market free development brought an average of only 2.5 percent penetration across the entire Central and Eastern European (CEE) region, with much lower figures for former Soviet states,” he said.

However, he suggested the use of ILS mechanisms could not only provide reliable protection for governments to access much faster disaster recovery financial protection, but also help to resolve the issue of low penetration and overall underinsurance.

This year there have been a number of examples of how parametric mechanisms can work, and in particular they have proved how quick settlements can be, Savrassov explained.

He cited the Caribbean Catastrophe Risk Insurance Facility paying out for Irma and Maria as well as Mexico’s Fund for Natural Disasters (Fonden) and its response to the magnitude 8.1 Chiapas earthquake.

“Needless to say, fast access to relief finance with transparent, fair and well-defined trigger mechanisms brings unique advantages to local governments, allowing rapid and effective response to disaster consequences,” said Savrassov.

In terms of some of the losses seen in the third quarter, he suggested these will be learning events in the same way other notable storms have been in the past.

“Even though estimates indicate that ILS investors will absorb a digestible amount of losses—albeit smaller than general reinsurers—the whole ILS framework has been properly stress-tested,” he said.

From an investor’s perspective, Savrassov expects an inflow of new alternative capital that would want to capitalise on post-event rate increases.

“For prices, there is a naturally expected healthy hike, which is determined by overall expectations of the reinsurance market as well as essential demand from ILS players to get a fair payback for their commitments to losses,” he continued.

“In our opinion, the ILS sector demonstrates real maturity and could be considered as one of the key trends for capital and reinsurance markets convergence and one of the future faces for catastrophic risk protection.”