AIR Worldwide dominates catastrophe bond risk modelling in 2011

2011 saw a big change in the use of risk models for catastrophe bond and insurance-linked securities transactions. The launch of a new U.S. hurricane model by risk modelling firm RMS at the end of February 2011, which increased modelled expected loss across many cat bond covered regions, caused a slowdown in issuance as the market came to terms with this new modelled view of risk. That wasn’t the only impact, it has also resulted in a big change in the number of deals flowing to the different risk modelling firms.

In reinsurer Swiss Re’s recent ILS market update, which we covered in more detail here, they discuss the number of cat bond and ILS deals which were modelled by each of the major risk modelling firms. At the time of the release of the new U.S. wind model, according to Swiss Re nearly one third of all outstanding U.S. hurricane cat bonds had used RMS as the modeller on the transaction.

Since the change to their risk model RMS has only participated as modeller on one catastrophe bond (the Golden State Re earthquake, workers comp deal), while AIR Worldwide have become dominant in the sector by participating in 16 transactions and EQECAT in three. RMS have also modelled one life insurance-linked security.

In previous years RMS have tended to be the more dominant of the risk modelling firms involved in catastrophe bond deals, so this decline in their participation in transactions is yet another sign of the impact the new model had on the markets confidence.

Of course an increased view of risk may very well become the correct view of risk, and other risk modelling firms are likely to increase their view of risk with new model releases in the future. So there is a high likelihood that RMS’s U.S. hurricane model will become more frequently used as it’s output becomes more accepted by the market over time.

The graph below shows the risk modelling firms used in cat bond and ILS transactions during 2011. It also includes Milliman who modelled the Vitality Re II deal.

2011 catastrophe bond and ILS transactions by risk modeller - Source: Swiss Re Capital Markets (as of 31st Dec 2011)

Note: It’s common for re/insurers, investors and others involved in the cat bond and ILS markets to have access to all of the major cat modellers software platforms. These figures only reflect the use of those models in public cat bond and ILS issuances during 2011.