Parametric ‘cat in a box’ Israel earthquake reinsurance deal completed

by Artemis on March 6, 2014

A first of its kind Israel earthquake parametric reinsurance transaction has been brought to market successfully by reinsurance firm Munich Re and capital markets reinsurance broker arm Aon Benfield Securities for Israeli insurer I.D.I.

The innovative transaction uses a parametric ‘cat in a box’ solution, which would enable any potential loss event to be easily calculated and any claim payout to be made rapidly.

The beneficiary of the reinsurance protection is Israeli insurance and financial services company Israel Direct Insurance (I.D.I.) Company Limited, which has secur$14m (NIS 50m) of protection from the transaction.

Aon Benfield Securities, the capital markets unit of the reinsurance broker facilitated the transaction, while reinsurer Munich Re structured the transaction and is also the ultimate risk carrier, or reinsurer, for the protection.

Steven Kostyn, Vice President of Risk and Reinsurance at I.D.I., commented; “We are very happy with the solvency-related value of the coverage secured via this parametric transaction, which provides protection not only for standard insurance risks but also for the wider financial and operational risks to an insurance company involved in an earthquake event.”

The reinsurance protection has been secured through a derivative structure with a parametric trigger using the ‘cat in a box’ approach of defining boundaries within which a qualifying event must occur. Munich Re said that it is prepared to devise similar and additional solutions for Israeli insurance companies to meet any demand for effective earthquake protection in Israel.

Paul Schultz, Chief Executive Officer of Aon Benfield Securities, said; “We are pleased to have arranged the first Cat in the Box parametric contract for an Israeli insurance company. We believe this creates new opportunities for clients in the Israeli market and we greatly appreciate the collaboration with I.D.I. and with Munich Re in bringing this first deal to a successful conclusion.”

Andreas Pollmann, Client Management Executive at Munich Re, added; “Munich Re is pleased to be the risk carrier for this transaction with I.D.I. demonstrating the ability and commitment to complement traditional reinsurance with innovative and sophisticated solutions also to the Israeli insurance market. The realization of this transaction together with Aon Benfield Securities is another example of good cooperation for the benefit of the clients in the Israeli market.”

The parametric trigger can be an underused tool in the risk transfer options available to insurers. It provides a mechanism for transparent and rapid payout afer an event and while there is additional basis risk, compared to an indemnity protection, in some regions of the world it is well suited due to the market environment. It is also a perfect solution where additional protection is being sought, particularly at peak layers, where the event parameters can be directly attributed to a chance of significant losses for the ceding insurer.

Adding a ‘cat in a box’ to a parametric trigger, so likely defining a geographic area within Israel where an earthquake of a certain magnitude or greater must occur for the protection to trigger, is an efficient solution for insurers in some less well modelled or less developed markets who are seeking peak risk reinsurance protection.

“We are pleased to have been able to support our client with this non-conventional product in the Israeli market and thus help meet I.D.I.’s demand for suitable earthquake cover beyond and in addition to conventional reinsurance solutions”, added Ludger Arnoldussen, member of Munich Re’s Board of Management responsible for Germany, Asia/Pacific and Africa.

Munich Re said that it sees parametric covers as a valuable risk transfer tool and a useful complement to traditional insurance and reinsurance covers.

“These parametric trigger-based solutions are valuable for clients in segments where quick payouts after a catastrophic event are essential. Munich Re can leverage its deep nat cat know-how to develop such tailor-made solutions to support its clients”, said Thomas Blunck, member of Munich Re’s Board of Management responsible for Special and Financial Risks.

Aon Benfield’s specialist catastrophe and risk modelling unit Impact Forecasting provided support for the transaction through catastrophe modelling support and development.

Goran Trendafiloski, a catastrophe model developer at Impact Forecasting, said; “Impact Forecasting’s Israel earthquake model and catastrophe modelling platform ELEMENTS provides an up-to-date architecture to model clients’ data with the highest spatial and exposure resolution, thus contributing towards a more reliable estimation of I.D.I.’s earthquake risk and its understanding and quantifying of the uncertainty. The transparency of the model’s technical details helped facilitate I.D.I.’s decision to purchase this parametric cover.”

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