The issuance of the world’s first terrorism catastrophe bond by UK government-backed mutual terrorism reinsurance facility, Pool Re, is the latest step in its journey of trying to normalise the market through an increased understanding of the risk, according to its Chief Executive Officer (CEO), Julian Enoizi.
The £75 million Baltic PCC Limited (Series 2019) catastrophe bond transaction, launched in February of this year, saw Pool Re utilise the capital markets for a source of retrocessional protection for the first time, and is subsequently the first terror deal in the history of the catastrophe bond market, as shown by the Artemis Deal Directory.
Following the successful launch of Baltic PCC Limited, which achieved a number of innovative firsts, Artemis spoke with Pool Re executives about the firm’s thinking behind the insurance-linked securities (ILS) transaction and its experience working with the capital markets for the first time.
“We have been researching the ILS market and the possibility of finding a different source of capital for several years and we believed that a combination of factors meant that now was a good time to try and tap into the opportunity it represents. The passing of UK legislation was one factor, but advances in our modelling capabilities meant that we felt that we had a realistic prospect of success given how much we now know about the peril compared to even five years ago.
“It wasn’t simply a matter of requiring more capacity but we also wanted to diversify the sources of capacity with different investors. Furthermore, it enabled us to build out the capital structure we have constructed over recent years helps to move the UK government, and ultimately the UK taxpayer, further from the risk. We are trying to normalise the market and the best way to do this is to help it understand threat actors, vectors and scenarios so as to get the market more comfortable with the risk and therefore able to take on more of it.
“The commercial retrocession programme, which began in 2015 was one of our first steps in seeking to achieve this. Increasing member retentions was another. Returning contingency to the private market yet another. Issuing an ILS is a further, important step on that journey,” said Enoizi.
After being approved towards the end of 2017, the UK ILS regulatory regime has worked on a number of ILS transactions, including the Pool Re terrorism catastrophe bond.
Ian Coulman, Pool Re’s Chief Investment Officer (CIO), offered some insight as to why the government-backed reinsurer selected the UK over other, more established ILS domiciles.
“London is one of the leading centres for insurance. It has the expertise, experience and knowledge in risk transfer. The passing of legislation in 2017 to enable the issuance of ILS demonstrates how the industry and government worked together and recognised the need for the industry to evolve. Given Pool Re’s own evolution the timing was right to explore ILS as an alternative source of risk transfer,” said Coulman.
Adding, “The process has worked efficiently with all parties involved in the process being supportive and working tirelessly to ensure the issue has been successful. A lot of experience has been gained from the process and I can only believe it will help to keep London at the forefront of the insurance industry and the ILS market. Indeed, our view is that there is plentiful capacity for standard catastrophe perils and that London should therefore focus on the more esoteric perils.”
As noted by Enoizi, Pool Re’s catastrophe bond transaction is the latest step in its ILS journey and, the company’s Chief Underwriting Officer (CUO), Steve Coates, explained to Artemis that Pool Re views the capital markets and ILS as a permanent fixture in its retrocession program going forwards.
“We recognise the benefit that the ILS market offers to transfer risk to a different range of investors. The retrocession placement in 2015 was the start of a journey which aimed to re-engage that market in terrorism, in aggregate form. We were able to successfully place the treaty at that time, and in the intervening years have extended the programme to more than 50 markets compared with 35 in 2015.
“Given ILS is a significant element of the global catastrophe market it was always our intention to seek to involve the capital markets when we had not only established the retrocession programme but also built the modelling capability to the extent it would be seen as credible by the market.
“We expect that as we develop and enhance our modelling capabilities and investors become more comfortable with the risk, we will be able to transfer more risk both to the ILS market and the retrocession markets in parallel,” said Coates.
Enoizi concluded by underlining how “tremendously successful” bringing a new peril to the ILS market, in Sterling and the first stand-alone terrorism-linked ILS deal, has been, especially in light of the testing market environment.
“It demonstrates how the ILS market continues to evolve and is willing to entertain new perils that only a few years ago would have been unheard of.
“In the future, we hope other terrorism pools will follow our lead and who knows, the day may even come when risk is shared internationally,” he said.