India’s GIC Re approves use of catastrophe bonds for risk transfer

India’s national reinsurance company, General Insurance Corporation of India or GIC Re for short, will look to catastrophe bonds as a potential source of risk capital and transfer as it seeks to provide cover for losses and access capital at cheaper rates, according to a report.

GIC Re primarily operates in its home country, providing reinsurance solutions for risks in India, as well as more recently branching out into other countries across the Afro-Asian region, in South East Asia, the Middle East and Africa. As such any catastrophe bond that the reinsurer successfully brought to market could mark a new first in terms of risks and perils ceded for the insurance-linked securities (ILS) market.

According to a report in the Economic Times of India, GIC Re will attempt to be the first Indian company to sponsor a catastrophe bond issuance. It says that the reinsurer will seek to issue cat bonds in the U.S. to cover natural disaster risks such as earthquake, flood or tsunami.

GIC Re is still in the early stages of planning a cat bond issuance it seems, but the issue has been discussed at board level and approval to pursue a cat bond issuance has been received.

The Economic Times reports the Chairman of GIC Re, AK Roy, as saying; “We have got board approval to raise funds through Cat bonds. Now, we are in the process of hiring a consultant. Our outgo will be less if we pay bondholders.”

So the expectation seems to be that a cat bond issuance may be cheaper than other forms of risk capital. Whether this will prove to be true, particularly if it is for a peril or region that is new to the cat bond market, remains to be seen. Investors could demand a premium for any new perils and regions unless they are extremely well modelled and understood. Despite that, the multi-year nature of a cat bond and the strong investor appetite for risk in cat bond form could well make a cat bond issue cost-effective for GIC Re.

Sensibly GIC Re will look to U.S. investors to sell any resulting cat bond. AK Roy said; “Indian market has not tasted this kind of a product. We do not know whether there will be any takers here.”

GIC Re has suffered some fairly heavy losses in recent years, with the flooding in Uttarakhand this year, Thailand floods, Japanese earthquake and Christchurch earthquake all impacting the reinsurer. This has caused the reinsurer to look to any way of reducing its cost of risk capital and risk transfer.

GIC Re has also recently led the launch of a catastrophe reinsurance pool for the Asia and Africa region, which has the backing of 14 reinsurers and launched with $20m of capacity. That pool will also require its own retrocessional risk transfer in future so if GIC Re can successfully launch its own cat bond perhaps the pool could look to the capital markets as well in future.

If GIC Re can successfully access the capital markets as a source of risk transfer through the issuance of a catastrophe bond it will be an important step forwards for the market. Bringing new sponsors to the ILS and cat bond space is important for the markets growth, particularly if they are bringing new and diverse risks to investors. Any cat bond that is marketed to investors is likely to be looked at very seriously and if well structured and modelled may be very well received.

We’ll update you should anymore information become available.