Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Cat bond sponsors benefit from enhanced price discovery: Kusche


The transparent and liquid nature of traditional catastrophe bond placements, over more privately placed ILS transactions and traditional reinsurance agreements, provides sponsors (and investors) with a unique price discovery, says Swiss Re Capital Market’s Philipp Kusche.

Speaking at the 2015 ILS Bermuda Convergence event in November 2015, Director, ILS at Swiss Re Capital Markets, Philipp Kusche, discussed how the transparency and liquidity of the traditional 144A cat bond market provides a unique opportunity to gain an element of price discovery for a sponsors risks, ultimately something that can help with their reinsurance placement as well.

“In a cat bond placement process, and the price discovery a sponsor gets is really fairly unique in the sense that a very large investor base will essentially agree on a price level,” said Kusche, noting that achieving true price discovery in reinsurance or more privately placed deals, is much more difficult.

“And if not during the issuance, then (true price discovery can be achieved) through the secondary market activities and through the transparency around that activity, including the newly established trade system, which now also reports the ILS trade, so a sponsor can continuously see how investors value their risk, essentially,” continues Kusche.

Within a typical, traditional reinsurance transaction a sponsor will only be aware of the value of risks on the renewal dates, explains Kusche, which usually happens once a year.

Whereas the ability to access and track information or data via a trading desk or cat bond indices, enables sponsors to essentially, on a weekly basis, “get a relatively good feel for what the true value of the risk is from an investor perspective,” explains Kusche.

Kusche notes that a benefit of this is the bargaining power that can be gained from being able to view and asses what the risk is truly worth on a regular, typically weekly basis.

And this doesn’t just apply to pure cat bond sponsors, as Kusche explains, using Citizens’ Everglades catastrophe bond platform issuance and reduced reinsurance costs from 2011 to 2014, as an example, “the use of a traded product in your risk tower” is essential in gaining bargaining power and having access to useful pricing and issuance information, said Kusche

Kusche explains; “I think the rapid decline of their reinsurance cost was certainly partially fuelled also by the transparency the cat bond (Everglades) delivered, and the information investors had and also the growing investor base participating in the risk transfer programme.”

The transparency and resulting efficiencies of the catastrophe bond and increasingly the broader ILS market are becoming ever more understood, realised, and utilised within the overall reinsurance landscape.

As the majority of firms now incorporated at least some ILS capacity, whether catastrophe bonds, ILWs, sidecar involvement, collateralised reinsurance and so on, within their overall investment portfolio, or risk tower.

The benefits highlighted by Kusche are elements that have contributed to the asset classes’ rapid rise and success in the global risk transfer landscape, with more and more sponsors and investors showing a heightened interest and understanding of ILS.

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