A.M. Best seeks greater disclosure of cat bond basis risk

Ratings agency A.M. Best has long been a proponent of ensuring that the basis risk of non-indemnity catastrophe bond transactions is transparent and fully disclosed in order to calculate the amount of reinsurance credit that can be claimed by a cat bonds sponsor. Now in a report on their outlook for the U.S. P&C insurance industry they are calling for increased diligence on basis risk disclosure.

Back in 2008 we wrote about A.M. Best’s desire to harmonize the way basis risk is calculate across both catastrophe bonds and industry-loss warranties (ILWs). Now we suspect that there may be an update to their 2006 ratings methodology report Gauging the Basis Risk of Catastrophe Bonds in the near future.

In their U.S. P&C insurance outlook report Best says that the prevalence of non-indemnity structured transactions in the cat bond market, almost three quarters of cat bond deals use non-indemnity triggers, means that greater disclosure is required to ensure that the amount of reinsurance credit claimed is accurate.

This is not just important for ratings agencies. With the coming Solvency II regulatory environment it is important for sponsors to be able to justify the level of reinsurance and risk transfer that a transaction benefits them with.