Ever since the launch of a new U.S. hurricane model by risk modelling firm RMS at the end of February 2011, which increased modelled expected losses across many cat bond covered regions, AIR Worldwide has been the dominant risk modeller used in new property catastrophe bond deals. In 2012, AIR’s risk models have been used in 100% of the public 144a cat bond transactions which are exposed to property risk.
Of course that’s not to suggest that the other risk models by RMS and EQECAT aren’t used in the development of a cat bond deal, in fact most sponsors will be looking at their risk across all three of the main platforms. The majority of cat bond investors also prefer to have a multi-model view of the risk they are investing in and many subscribe to all three platforms. But for issuance purposes, providing the probability of attachment and exhaustion metrics for cat bond offering documents and acting as calculation and reset agent, AIR remains the dominant force in 2012.
In 2011 AIR Worldwide modelled 16 out of 20 transactions, at 76% clearly dominating risk modelling in the cat bond space that year. In 2012 their dominance has so far been total, with every property risk exposed public cat bond using their model. According to data from the recently published PCS quarterly cat bond market update, in 2012 so far, AIR Worldwide has provided modeling services for cat bond transactions valued at $3.8 billion, compared with $3.1 billion for all of 2011 and $1.6 billion for 2010. So use of AIR’s model in cat bond deals has grown 238% in two years, not including the fourth quarter of course.
A spokesperson at AIR told us; “To date, AIR Worldwide (AIR) has led the competition in the provision of catastrophe bond modeling services to companies seeking to participate in the insurance and risk-transfer markets; in fact, AIR has been the modeling agent for 100 percent of all public, property catastrophe bonds issued thus far in 2012. AIR has extensive experience working with all trigger types, and has modeled some of the most innovative structures in the market. The company’s seasoned cat bond modeling team also has a sterling reputation for getting work done in a timely and thorough manner. And the stability of AIR model results give confidence to both issuers and investors.”
Rob Newbold, Senior Vice President, AIR Worldwide, commented; “AIR modeling has dominated the market this year. That speaks not only to our execution, it also demonstrates that when companies have a choice—unconstrained by internal processes and infrastructure — they choose AIR.”
How long this dominance of AIR in cat bond issue modelling will last is impossible to say. Modelling is always a hot topic in the cat bond space, a major update to the AIR model which impacted expected losses could swing the favour back to one of the other modelling firms. It’s also possible that cat bond sponsors may choose to put the probability of attachment derived from all three of the main models on their offering documents, allowing investors to see the full spectrum of opinions on how risky a deal is. For the moment it seems likely that while U.S. hurricane risk constitutes so much of the market, and that is the specific peril that triggered the shift away from RMS, AIR could continue to be the dominant model.