Willis & Endurance team-up on ‘cat-in-a-circle’ Australian weather transaction

Broker Willis Group Holdings, global risk advisor, insurance and reinsurance broker, and Endurance Global Weather, a division of reinsurer Endurance Specialty Holdings, have completed an extremely innovative weather transaction for an Australian client.

Willis has designed and placed the innovative, derivative-based weather risk transfer solution to protect its client Roy Hill Holdings Pty Ltd, an emerging global mining, rail and port venture, with multi-year cover against cyclones and heavy rainfall delaying the construction of what is expected to be the largest single-site iron ore mining operation in Australia.

The transaction, which was completed in advance of the start of the 2013 cyclone season, is backed by Endurance Global Weather, a division formed by Endurance when it acquired Galileo Weather Risk Management a year ago.

The transaction features an innovative parametric trigger and uses cyclone and rainfall indices to assess the size of payout as well. It’s clearly a transaction which has taken some time to put together and it is encouraging to see such an innovative and technical transaction come to market in the, sometimes quiet, weather risk transfer market.

The coverage provides Roy Hill with protection from the financial impact of a named cyclone passing through a specified geographic area. This parametric trigger zone covers the company’s 55 million tonne per annum mining, rail and port project currently under construction in the Pilbara region of Western Australia

Willis said that this unique ‘cat-in-a-circle’ trigger, structured and executed by the brokers Global Weather Risk Practice, provides the client Roy Hill with event based coverage based on the actual duration that a cyclone spends within the indemnification zone, as well as the amount of cyclone rainfall across three Australian Bureau of Meteorology weather stations.

This is a very interesting solution for a mining project, which is particularly exposed to disruption and delays caused by weather. It’s easy to see how a similar trigger could be used for other industries with similar exposures and also perhaps for other perils as well.

The transaction has a total limit of AUD56 million ($50.7m) and will span two cyclone seasons. Willis said that the cover will respond to any qualifying defined cyclone and rainfall events breaching the trigger during the period of construction leading up to the mine’ scheduled opening in 2015.

The index-based cover differs from indemnity protection as there is no requirement for the insured to prove its losses or damage to any assets from the cyclone. Being parametric in nature the indemnity is based purely on the performance of pre-agreed cyclone and rainfall indices.

Commenting on the solution, Barry Fitzgerald, Chief Executive Officer of the insured Roy Hill, commented; “We are pleased that our insurance partners have been able to develop such a highly-tailored product to provide prudent risk management outcomes for the critical development phase of our project.”

Steve Hearn, Deputy CEO of Willis Group, added; “Traditional construction and property policies will cover the damage caused by a cyclone, but not the financial impact of project delays and additional wages where there is no damage to the insured assets. This bespoke solution was designed to cover this traditionally uninsurable risk, which Roy Hill identified as a particular concern. Willis leveraged its sophisticated analytical capability to model the probability and impact of cyclones and heavy rainfall in this region of Australia, enabling Willis to structure and execute a solution led by Endurance which responds to Roy Hill’s highly specific requirements.”

John Charman, Chairman and CEO of Endurance Specialty Holdings Ltd, said; “This transformational risk solution is representative of our strong relationship with Willis globally as well as Endurance’s commitment to creating strategic partnerships in the emerging Asia Pacific region. Working closely with Willis, we were able to combine our Global Weather team’s analytic expertise with our long-term capacity and strong balance sheet to execute an innovative structure specific to Roy Hill’s complex and unique risk exposures.”

This interesting transaction has many potential use-cases, for event cover, project cover, construction risks cover and others. It’s also interesting how the combination of a parametric trigger based on location has been combined with weather-indices which will define the size of loss, that too has many potential use-cases.

Could a similar trigger be used to provide cover for a city from hurricanes, for example? With the trigger breached by a hurricane passing through a parametric box but the payout defined by wind speeds, rainfall and perhaps storm surge? How about flood; perhaps rainfall in a defined location could trigger a contract with river gauge measurements providing a payout factor?

Also, could this trigger be structured into a catastrophe bond, rather than derivative form? It would seem perfectly suitable for a cat bond. The fact this has been structured as a derivative is likely very efficient for a corporate client.

The other thing to point out on a cover such as this is its suitability and attractiveness to capital markets investors. Third-party capital would be comfortable backing transactions such as this and it will be interesting to see whether Willis can successfully market similar deals to its client base. With third-party capital backing industry-loss warrants (ILW’s), which are structured similarly to derivatives, it seems likely that ILS and alternative reinsurance capital would be keen to access this type of transaction as well.