County level cat bond triggers and their potential uses

by Artemis on July 30, 2008

The county level trigger structure of the recent Blue Coast Ltd. catastrophe bond from Allianz is said to offer greater transparency to investors, a better way to manage basis risk and the ability to create a spread which more closely matches an insurers loss portfolio. All great things which could herald an easier way for cedents to access the capital markets, especially for smaller insurers with local clusters of policies (even local government could utilise this type of structure to hedge their risks in the capital markets).

It strikes me that this may also allow insurers to begin thinking of placing catastrophe bonds for flood risk. To date few cat bonds include any flood risk and none (as far as I’m aware) are solely devoted to flooding. The ability to measure losses at county level may be just the thing to allow this to now happen.

Flood losses are notoriously localised with large storms sometimes devastating one county while leaving a neighbouring one largely untouched. Could this new way of structuring the triggers at a lower more local level allow this to happen? It also brings to mind hail and tornado risks which again can be very localised but cause large losses. Your comments are appreciated!

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