Hurricane Joaquin stimulated ‘live cat’ capacity discussions

The uncertainty surrounding hurricane Joaquin and whether it would make a U.S. east coast landfall stimulated some offers, discussions and interest in ‘live cat’ protection buying last week, according to market sources.

On late Wednesday and Thursday of last week a number of reinsurance brokers were offering capacity and pricing for hurricane Joaquin industry loss warranties (ILW’s). Interest was said to be mixed, as the uncertainty in the forecast meant potential buyers were waiting for updated forecasts before making any commitments.

The capacity was there and guaranteed we’re told and the rates-on-line (ROL) offered seemed reasonably attractive, to capacity providers at least. In fact we’re told that in some cases the pricing offered was actually higher than equivalent ILW’s when superstorm Sandy was still down by the Caribbean in 2012.

Live cat ILW’s enable protection buyers to secure a slice of reinsurance or retrocessional protection that will pay out based on the eventual reported insurance industry loss. They are ‘live’ as sold when a storm is underway and threatens a landfall and can typically be bought even as near as a few hours before impact.

Joaquin live cat ILW’s were offered at industry loss triggers of as low as $7.5 billion, we understand, then at $15 billion and $20 billion by some brokers. Likely buyers of this type of capacity could include insurers with large market shares in the region where landfall was mooted, reinsurance companies, retrocessionaires and also insurance-linked securities (ILS) fund managers seeking to hedge potential losses.

A $7.5 billion live cat ILW for Joaquin would have had a rate-on-line of around 20% to 22%, while a $15 billion was between 12% and 13% ROL, according to sources.

We’re also told that some live cat capacity had been offered on a parametric basis as well, with payouts linked to final wind speed reports from the NOAA at the time of landfall, as well as location.

The capacity behind these ILW and live cat products would likely have been a mix of both traditional and alternative capital. Some ILS funds offer this type of capacity on a speculative basis, when capital allows, while a number of large traditional reinsurers or retrocessionaires are also known to offer this type of capacity.

We understand that Joaquin live cat ILW capacity was offered in both swap and reinsurance contract form, with triggers based on PCS reported industry losses.

Sources suggested that buyers were not in evidence. Given the significant uncertainty in the Joaquin forecast track, reflected in the swing to the east and the eventual track out towards Bermuda, that’s not surprising and any buyers would have been left disappointed.

Joaquin was a great demonstration of why it is important to ensure that re/insurers and ILS players have an eye on the latest weather information, a view across the models and enough internal expertise to be able to interpret forecast models for themselves.

When Joaquin’s track pointed at a New York area landfall it was easy to foresee another Sandy-esque sized loss of over $15 billion, based on the intensity and forecast path. That could have made these offers of live cat capacity tempting if you’re exposure to that landfall scenario was high.

The availability of live cat capacity is important though, as it enables any exposed re/insurance or ILS players to add protection based on their exposure to a specific and current storm. That’s a valuable source of additional protection when a hurricane threatens to strike a major city or insurance penetration hotspot.