Live cat trades completed on hurricane Harvey threat

by Artemis on August 26, 2017

The so-called “live cat” market came to life as hurricane Harvey approached the Texas coastline, eventually making landfall as a Category 4 storm, as re/insurers and some ILS funds looked to lock in last-minute protection and we understand that a number of ILW’s traded, but volume was relatively light, according to sources.

As hurricane’s and storms approach insurance, reinsurance and ILS funds with exposure may look to buy protection against a certain level of impact.

These live catastrophe or live cat trades are typically based on industry losses, so would trigger if a reporting agency (such as PCS) said that the re/insurance industry impact was above a pre-defined level (usually in billions of dollars).

Parametric live cat products can also be purchased, but these are less widely used, perhaps due to the fact defining an industry loss trigger is typically a faster process and establishing the parameters to minimise basis risk can take time (of course industry triggers have basis risk too).

Patrick Gonnelli, Partner and Global Head of ILS Distribution and Trading at TigerRisk Capital Markets & Advisory told Artemis that live cat trades were completed on Thursday and on Friday as hurricane Harvey approached, with the majority of activity focused on an industry loss trigger of $10 billion.

These trades typically price in a range from a 12.5% to 13.5% rate-on-line.

Live cat trading volumes were lower than seen with hurricane Matthew last year, which Gonnelli said was due to the short amount of time between the intensification of hurricane Harvey and its landfall.

Industry loss trigger live cat trades are typically derivative in nature, so offer a form of reinsurance or hedging that will pay out should the reported industry loss be above a pre-defined trigger amount.

The majority are traded in an industry loss warranty (ILW) form.

It’s too early at this stage to know whether any completed live cat trades with a $10 billion trigger could payout. That should become clearer in the coming days.


Another broking source told Artemis that live cat trading on Thursday as Harvey approached was seen as focused on a $7.5 billion industry loss trigger, while by Friday interest from protection buyers had shifted to the $10 billion industry loss.

This broker felt that volumes of live cat trades completed was higher at the $7.5 billion mark than at $10 billion.

Also read:

Harvey makes landfall as Category 4 hurricane, 130mph winds.

Half of hurricane Harvey loss could fall to reinsurance: J.P. Morgan.

Hurricane Harvey – catastrophe bond exposure.

As Harvey nears Texas, analysts highlight re/insurers risk of losses.

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