Collateralized Reinsurance

Collateralized reinsurance refers to a reinsurance contract or program which is fully-collateralized, typically and in the cases we are most interested in on Artemis, by investors or third-party capital.

Collateralized reinsurance can be a much simpler entry point for ceding companies, into accessing the insurance-linked securities (ILS) world of reinsurance and retrocessional protection. Typically, collateralized reinsurance products are indemnity in nature, and can provide a simple alternative to a rated reinsurance balance-sheet.

For those looking to purchase protection that are new to the ILS world, collateralized reinsurance can be simpler, and less time consuming when compared with the issuance of a traditional 144A catastrophe bond.

Collateralized reinsurance allows ILS funds, hedge funds, pension funds and unrated, third-party capitalised reinsurance vehicles to participate in major reinsurance programs as the contracts they write are fully-collateralised.

By participating in collateralized reinsurance activities these investors and capital providers are able to provide capital to underwrite insurance risk without requiring a rating, thus enabling them to receive the premiums as a return on their invested collateral.

The market in collateralized reinsurance enables these institutional investors to directly participate in the reinsurance market and provide a source of risk capital to cedents in the market. This risk capital is increasingly popular as it helps a cedent diversify its sources of reinsurance protection and due to the fully-collateralized nature of the covers.

The collateralized reinsurance market remains the largest sub-sector of the ILS space, followed by the catastrophe bond marketplace.

It is a private reinsurance contract that is functionally identical to traditional reinsurance, with one critical difference: the provider (the ILS investor or fund’s) obligation to pay claims is 100% backed by cash collateral or equivalent held in a trust. This removes all counterparty credit risk for the sponsor (buyer of protection), which is a key advantage over relying on a traditional reinsurer’s balance sheet.