In this the latest in our series of interviews with figures from the risk transfer and insurance-linked securities markets we spoke with Gary Kerney, Assistant Vice President at Property Claim Services which is part of Verisk Insurance Solutions. Property Claim Services (or PCS as they are known) is the leading source of data on insured property losses from catastrophes in the U.S. As a result they are a key part of the catastrophe bond market where they feature as reporting agency and their data acts as a trigger for many industry-loss transactions.
Tell us about the PCS Catastrophe Serial Number and how it became a trusted source of reporting on catastrophe insured losses?
PCS and its predecessor organizations have been identifying catastrophes, assigning them serial numbers, and estimating insured property damage they caused since 1949. Since then, our data has become an important resource for the (re)insurance industry, which has used PCS information for everything from gauging loss estimates to capital management planning. Clearly, there is a need for consistency in catastrophe definition and tracking, and that’s the service we’ve provided.
What led to PCS estimates of insured loss data being used as a trigger in catastrophe bonds? Was it a PCS initiative or a sponsor who first raised the idea?
We made our first move into the ILS space at the request of the Chicago Board of Trade in 1997, to facilitate catastrophe risk trading. After that, we developed regional index information based on our estimates of catastrophe-induced insured property damage. Other organizations, including sponsors and intermediaries, began to ask us if they could use our estimates as triggers in ILS transactions – a natural fit given that PCS estimate information is based on actual loss reports from insurers doing business in the areas affected by a catastrophe. They were also drawn to the transparency we provide.
PCS provide data for catastrophe events in the U.S., Puerto Rico and U.S. Virgin Islands. Would you ever see your scope expanding to include other areas?
We expanded our services to include Canada in 2010 (www.pcs-canada.com), and included events identified as catastrophes in 2009. So far, PCS has identified 26 events in Canada – including high winds, hail, and tornadoes – that have cost insurers nearly C$4 billion. And, our Canadian data has already been used in a catastrophe bond (Blue Danube).
What’s your opinion on the state of the ILS and catastrophe bond market right now?
What’s particularly interesting about the cat bond market right now isn’t the big numbers – despite the fact that 2012 is the busiest year in the market since 2007. Rather, it’s the mindset behind them. Sponsors, investors, and intermediaries lived through the growth years that led to the 2007 peak. And, they remembered what followed, from the financial catastrophe of 2008 to the ensuing uncertainty and subsequent cat bond market recovery.
Today, we’re seeing capital paired with a deeper level of market experience that simply didn’t exist five or six years ago. Sponsors, investors, and intermediaries have seen, learned, and applied the lessons the market has provided, and the result has been the prudent deployment of capital to vehicles that show the benefit of responsible innovation.
Many believe that the ILS market will continue to grow, and I’m inclined to agree. Of course, a number of factors besides comfort with these risk-transfer vehicles will ultimately determine the future of this market, and a healthy respect for the unknown is crucial.
Do you see any issues or problems you have identified in the ILS market currently?
It will be interesting to see if the focus turns from keeping transaction costs down to features that provide investors with more protection from catastrophe losses. In today’s market, with favorable returns widely reported, investors appear to be more willing to accept indemnity-triggered bonds, for example, even though aggregate annual losses could accumulate for catastrophes that fail to reach the levels that would be used with an industry loss trigger.
At some point, I suspect a catastrophe year with high-frequency and low-severity catastrophes could result in investor losses, leading to a reevaluation of the widespread use of indemnity triggers. Additionally, a busy catastrophe year, in which indemnity bonds are triggered, would likely cause investors to take a closer look at moral hazard and the importance of trusted third-party data in preventing it.
How do you see the ILS and catastrophe bond market developing over the next few years?
I expect the ILS market to continue to grow, especially given the recent increases in the issuer base, the investor population, and transaction sizes. Additionally, I believe that responsible innovation will continue, as each year brings new insights and experiences that will help sponsors and investors understand and manage their risks and capital more effectively.
Any final thoughts for the Artemis audience?
I’ve noticed an interesting situation emerge: a tight retro market combined with an increased appetite for insurance-linked securities, both among sponsors and investors. In addition to this, as you remember, Scor increased the size of its contingent equity capital facility earlier this year. To me, all of this coming together suggests that the time is right for insurers and reinsurers to start thinking again about contingent equity capital.
Rather than go with what amounts to an indemnity trigger, however, there is an opportunity for sponsors to gain more flexibility over their facility structures by using the PCS Catastrophe Loss Index. This way, sponsors would be able to bring in a “per event” approach to new equity issuance, not to mention bring some transparency and reliability to the definition of a catastrophe. Doing so would provide a higher level of protection to existing shareholders, as well as the investors in the contingent equity capital deal who would become shareholders upon triggering.
We look forward to the discussion about ILS and contingent equity capital transactions in Monte Carlo next week.
Our thanks go to Gary for his time and insight into the work of Property Claims Services.
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