Mitsui Sumitomo hails first aggregate Japan typhoon-only cat bond

Japanese insurance group Mitsui Sumitomo Insurance Co. Ltd., a subsidiary of MS&AD Insurance Group Holdings, has hailed the completion of the first annual aggregate Japan typhoon-only catastrophe bond, its recently sponsored Akibare Re Ltd. (Series 2016-1) deal.

Mitsui Sumitomo explained that the Akibare Re 2016-1 cat bond provides it with a stable source of reinsurance protection over a four-year period, covering the insurer against losses resulting from Japanese typhoon impacts.

“Akibare Re 2016-1 is the first cat bond to provide protection against typhoon events in Japan on an annual aggregate basis,” MSI hailed.

The transaction is the first single peril Japan typhoon aggregate cat bond. In the past there have been multi-peril cat bonds featuring Japanese typhoon risks that have been structured on an aggregate basis, such as Montana Re Ltd. (Series 2010-1) and Vega Capital Ltd. (Series 2010-I), but this is the first to solely cover that peril for a sponsor.

MSI said that the annual aggregate nature of the Akibare Re 2016-1 cat bond will “serve to efficiently reduce MSI’s insurance underwriting risk by being able to respond if a single typhoon event or an accumulation of typhoon events in any fiscal year results in a large loss amount.”

MSI said that it as part of its goal to remain financial sound it uses reinsurance as a way to reduce the amount of risk it retains, on a net basis, helping to ensure stability for its customers and that their needs can be met in the event of a major natural disaster.

By sponsoring the catastrophe bond and tapping the capital markets for a portion of its reinsurance protection MSI has effectively diversified its sources of reinsurance, enabling claims to be recovered both from traditional reinsurers and the capital markets should major typhoons strike.

This supplements the traditional reinsurance coverage, the insurer said, while also providing stability and certainty on pricing over the four-year term.

Additionally, the annual aggregate nature of the Akibare Re 2016-1 cat bond further improves the insurers protection as it would allow for “a recovery on both a per event basis and an annual aggregate basis, thereby contributing to financial soundness and earnings stability.”

“MSI will continue to utilise both reinsurance and securitised products to further enhance MSI’s financial soundness,” the insurer explained.

The completion of the first pure Japan typhoon aggregate catastrophe bond shows that ILS investors are more confident in taking on this risk on an aggregate basis. In the past, any aggregate tranches featuring Japan typhoon risk were either only covering second and subsequent storms, or structured to protect the investors with higher deductibles.

It’s a sign of continued maturation of the ILS investor base, as well as of the heightened demand for new opportunities to invest in catastrophe risk.

As the investor base becomes more readily accepting of risks on an aggregate basis in diversifying regions, the coverage offered by catastrophe bonds will become more applicable to a wider range of local sponsors. That could help to increase interest in cat bonds from more Japanese insurers, ultimately helping to grow the amount of issuance coming from the region.

Also read:

– Mitsui’s Akibare Re 2016 cat bond grows to $200m, pricing drops.

– Mitsui Sumitomo in Akibare Re 2016, $175m Japan typhoon cat bond.