Resets (for catastrophe bonds and ILS)

Multi-year transactions, whether catastrophe bonds or collateralized reinsurance agreements, that don’t use a parametric trigger (so those with an indemnity or industry loss trigger) could expose investors to greater risks than they are being compensated for, over time.

To counter this, the trigger of a multi-year deal can be reset (typically annually) to maintain a constant exposure level to investors, via remodelling the bond based on the most current exposure data.

In addition, the reset is a useful feature for a cat bond sponsor, as they can update their covered portfolio at the end of a risk period, having the risk metrics recalculated and then pay a commensurate coupon to investors for the next risk period.

This allows for much greater flexibility in the coverage provided by a cat bond, enabling sponsors and investors to better understand any changes to the underlying risk while ensuring everyone is correctly compensated for the risks they hold.