As readers and the ILS market will now be aware, U.S. primary insurance group Allstate is back with a new $300 million Sanders Re Ltd. (Series 2017-1) catastrophe bond , targeting capital markets-backed U.S. multi-peril collateralised reinsurance capacity.
When we announced the deal just over a week ago the information we had from sources suggested that the Sanders Re 2017-1 cat bond is a pure indemnity bond, with its attachment and potential to trigger based solely on the indemnity claims experience of the sponsor Allstate.
But on further investigation it transpired that Sanders Re actually has an industry loss element to its trigger, with certain covered risks contribution to the attachment calculated using a PCS industry loss index with weighting factors.
In calculating the ultimate net loss attributable to an event covered by the Sanders Re 2017-1 catastrophe bond, we understand that, aside from paid losses from claims on property and other subject business, the calculation to determine whether the cat bond has been triggered will factor in an amount for auto losses and an amount for wind pool losses.
The amount of the ultimate net loss attributable to auto losses is actually defined using an index from PCS. We’re told the PCS index is calculated on a per-state basis, then weighting factors are applied for different coverage factors, giving a total figure that is added to the UNL loss total. Auto lines coverage is for all of the named perils covered by the cat bond.
The wind pool contribution to the total UNL loss works much in the same way, except this is just for the North Carolina and Texas wind pools in which Allstate participates, we hear. So a PCS created for named storms (as you’d expect the wind pool contribution is only for named storm risks) that affect these states, against which a wind pool factor is applied, to give the figure that is added to the UNL total.
We understand that this cat bond has been marketed to investors as having an indemnity trigger, as the contribution to expected loss from the industry loss trigger elements is so small.
Auto exposures make up just 8.6% of the total exposure of this catastrophe bond, while the wind pool contribution to expected loss is minimal at 0.8%.
As the industry loss index total for auto and wind pool losses is added to the UNL total of indemnity losses, in order to define whether the bond is triggered, the index related elements are really a secondary input to the overall loss calculation for this deal.
It’s a clever way to include losses from the auto lines of business, which on a UNL basis could be a much trickier task to calculate quickly, as well as the wind pool exposures which may not have as much transparency for Allstate to report on as rapidly.
By leveraging the industry loss index and weighting factors, to establish the contribution of auto lines and wind pools to the overall UNL under the cat bond deal, Allstate can include more of its business and ultimately expand the reinsurance coverage it benefits from.
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