ILS community “very supportive” of first terror bond: Pool Re’s Ian Coulman

The introduction of terrorism risk to the insurance-linked securities (ILS) market remains in its infancy, but the very supportive response from the investor base regarding Pool Re’s Baltic PCC Limited, the world’s first terror catastrophe bond, suggests the peril will be accepted.

In an interview with Artemis, Ian Coulman, the Chief Investment Officer (CIO) of UK government backed mutual terrorism reinsurer, Pool Re, explained that the ILS investor community was “very supportive” of the reinsurer’s first entry into the capital markets for a source of retrocession reinsurance coverage.

“Stand alone terrorism is a new peril, which is clearly beneficial from a diversification perspective. Thinking back to the early days of the ILS market, there was doubt about the appetite amongst investors to take on some of those early perils such as wind storms and hurricanes.

“Modelling of these perils evolved, and investors grew comfortable with the risk. Introducing terrorism risk is at an early stage, but we believe we will be able to lead the market to better understand the risk and eventually accept it as another peril,” said Coulman.

According to Coulman, Pool Re marketed its first catastrophe bond to a diverse group of experienced ILS investors, with support from specialist ILS find managers, pension funds, and also traditional asset managers located throughout North America, the UK, and Continental Europe.

Further supported by the impressive response to two consecutive years of heavy catastrophe losses, the ILS investor base is sophisticated, mature, and has shown a real willingness to assume an ever-broadening range of risks from a growing base of locations.

While Baltic PCC Limited was well received by the catastrophe bond and ILS community, as with any new and exotic peril class education was required in order to build both investor confidence, and comfort in this type of deal.

“We spent a significant amount of time explaining our modelling capabilities, how it has evolved and the collaborative work we have undertaken with Guy Carpenter and Cranfield University to develop the severity modelling. Particular note should be made of how modelling has developed over recent years from damage functions based on simple circular blast patterns through line of sight modelling, where larger buildings shield smaller buildings, to Computational Fluid Dynamics (CFD) which considers how blasts move over, around and between buildings,” explained Pool Re’s Head of Actuarial Services, Steve Burr.

“Moving to a CFD approach has reduced expected losses across most of the scenarios our actuarial team have modelled. Ultimately it serves to improve our understanding of potential losses and that of the private market. We were very transparent with investors and shared aspects of the severity modelling as well as the more challenging frequency assumptions,” he added.

Getting the first deal completed was always going to be a challenge, but the template is now there for the capital markets to successfully take on more terror risk in the future, something Pool Re is keen to see come to fruition.

“Now that the first terrorism issuance is done, we will seek to continue to work with investors so that they become more comfortable with the risk and expose more capital to it over time as a result and, of course, at a lower price.

“Indeed, terrorism may provide the template for other difficult to insure perils such as cyber,” said Coulman.

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