Insurance-linked note platform launched by Tullett Prebon

Tullett Prebon, a leading electronic and voice interdealer broker and part of the TP ICAP group, has launched a new issuance and trading platform for what it has termed Insurance Linked Notes, initially featuring catastrophe industry-loss instruments that will be fully-securitised to have the benefits of secondary liquidity.

The Insurance-Linked Notes (ILNs) are fully-collateralised, securitised, tradable insurance or reinsurance linked notes, allowing for the trading of and investing in catastrophe risks.

The platform allows companies to issue ILN’s to secure protection, which could be reinsurance or retrocession, while investors and ILS fund managers will be able to invest in catastrophe risks by providing the capacity to back ILN’s.

The platform will at first only support industry loss based ILNs, so insurance-linked notes that are structured using an industry loss trigger from recognised providers such as PCS and PERILS.

The ILN’s will all be issued through a Bermuda based special purpose vehicle, a segregated accounts structure named ILN Sac Ltd., and the notes are issued at point of trade with complete anonymity between buyers and sellers.

The ILN platform will feature tools to help both Protection Buyers and Protection Sellers structure and analyse potential industry-loss based contracts, which can then be placed into an auction process in search of matching capacity with the risk appetite to back the deal.

The platform features real-time analytics, to provide market insight and risk status, enabling meaningful trading decisions to be taken.

Each insurance-linked note structured and transacted using the platform will feature protection buyer and protection seller notes, with both tradable in the secondary market.

The instruments will typically be a 12 month or shorter industry loss triggered transaction, providing similar protection to other private ILS and catastrophe bonds, but in a structure that can be efficiently issued using the ILN platform.

Interestingly, an ILN can also be transformed into a reinsurance contract, which means that a traditional reinsurer looking to be able to prove the capital relief it benefits from with its coverage could use this platform as well.

This would happen outside of the ILN SAC vehicle, in the Artex SAC Ltd. vehicle, with the assistance of insurance manager and ILS facilitator Artex.

Tullett Prebon sees this as a new channel for securing reinsurance risk transfer, in a securitised, investable and tradable format, not just a platform that will take existing market volume away.

The interdealer broker aims to add other types of triggers in the future, including parametrics, to expand the potential range of users of the platform.

The company expects that its users could in the future include insurers, reinsurers, ILS funds and investors, as well as corporations and sovereign entities that find it an efficient way to access the capital markets for risk transfer.

Tullett Prebon has partnered with a range of companies to provide its ILN platform, including specialist insurance management firm Artex, risk analytics specialists Analyze Re, risk modelling firm Corelogic (and AIR Worldwide for licenced users), Property Claim Services (PCS), PERILS AG and the Bermuda Stock Exchange (BSX).

All Insurance-Linked Notes (ILN’s) issued through the platform will automatically be listed on the Bermuda Stock Exchange (BSX), enhancing the transparency and liquidity associated with them.

ILNs can be structured using a range of variables, from trigger attachment point, to region or state, peril, structure as occurrence or aggregate and duration of the contract.

When setting up an ILN in the system, users can get immediate feedback from the real-time analytics, on how tweaking these variables would affect the risk profile of the deal, its expected loss and ultimately its pricing.

Deal documentation will be available to all approved trading parties, including information on pricing at issue, mark-to-market pricing and secondary trading of ILN’s.

Tullett Prebon told Artemis it will conduct regular auctions, based on its clients input as to what ILN instruments they want to see, as well as standard contracts.

The trading occurs in a well-known system called Nova, an established volume matching system widely used in the interdealer broker world. Pricing will be illuminated on screen and transactions can either be executed online or over the phone with a Tullett Prebon broker.

“Auctions” will be run with due regard to Client demand, natural catastrophe risk seasonality, and reinsurance market renewal seasonality. Each auction session will last for up to 30 minutes, and Protection Buyers and Protection Sellers can participate via electronic interface, via the Tullett Prebon voice brokers, or both.

ILN deal sizes will be from a minimum of $5 million and up, but with no maximum as long as protection buyers and sellers are aligned on price.

Settlement for every trade will occur within 5 days of completion, with complete anonymity available to both sides of the deal.

The Insurance-Linked Note platform from Tullett Prebon is the culmination of several years of work with the ILS and reinsurance market, to ensure that the system offers a product that buyers and sellers will want to access and trade.

As a result, it’s safe to assume that some of the biggest ILS funds will be early adopters, both in buying their own protection, as well as offering their capacity to back ILN deals.

It will be fascinating to see how the market takes to this new channel for accessing protection and investing in reinsurance related risks.