The Caribbean Catastrophe Risk Insurance Facility (CCRIF) appreciates the diversity that the first directly issued catastrophe bond from the World Bank offers to its sources of risk capital, a key consideration in its decision to tap the capital markets.
For many sponsors of catastrophe bonds sourcing a portion of their reinsurance or risk transfer capital from a diverse source of capital markets investors is a key reason for sponsoring a cat bond. When disaster strikes it is good to source your reinsurance capital from many sources, including removing your reliance purely on the global reinsurance market.
The CCRIF recently participated in the first deal in the World Bank’s new Capital-at-Risk Notes Program, World Bank – CCRIF 2014-1. The cat bond notes provide $30m of fully-collateralized multi-year aggregate reinsurance protection against Caribbean named storms and earthquakes on a parametric and modelled loss trigger basis for the 16 CCRIF member countries. The transaction saw the World Bank enter into a catastrophe swap with the CCRIF mirroring the terms of the cat bond notes it had issued.
Isaac Anthony, CEO of the CCRIF, said; “CCRIF has previously been reliant on the traditional reinsurance market for its risk transfer but as the Facility seeks to grow and expand we felt it would be beneficial to diversify the sources of risk capital to include the capital markets.”
For the CCRIF, diversifying the sources of risk capital could also help it to avoid as much volatility in terms of price and contract terms and conditions at renewal time, with the capital markets perhaps seen as less likely to dramatically increase prices or tighten terms especially now the ILS market is maturing and growing so quickly.
“We are pleased to be part of this ground-breaking initiative of the Bank, and this will enable us to continue to offer our tropical cyclone and earthquake policies at the lowest possible price – an important consideration for our members in these times of economic and fiscal challenges,” continued Mr. Anthony.
The multi-year nature of a catastrophe bond allows the CCRIF to lock in its current reinsurance pricing and terms for, in this deals case, three years. That removes some uncertainty at renewal time, making the budgeting process easier and hopefully stabilising premium rates for the sixteen member countries of the CCRIF somewhat.
The other important factor for the CCRIF is that the cat bond matches the triggers which its member policies use. So the catastrophe bond cover is calibrated to pay out exactly when the CCRIF needs a financial boost in order to rapidly pay its members. Being parametric at its core the payout should be swift and uncertainty for investors removed, making this type of transaction transparent and attractive to investors.
The CCRIF’s mission is to provide cover that matches the exposures of the member countries as closely as possible while also providing quick payouts in order to assist with disaster relief. The cat bond will help the CCRIF meet that goal and in fact prove to be a more responsive layer of cover than any traditional reinsurance protection, given the collateral should be almost immediately available to the CCRIF in the event of a claim qualifying under the terms of its triggers.
CCRIF Chairman, Milo Pearson, commented; “This partnership is another example of CCRIF’s continuing efforts to explore ways to help the countries in the Caribbean Region in building resilience to natural hazards.”
These reasons, of diversity of risk capital sources, certainty of terms and price for the duration of the cat bond and perhaps a hope that prices may be more stable in future post-event due to the efficiency of the capital involved, are all reasons that new sponsors come to the catastrophe bond market.
The World Bank’s new cat bond note issuance platform is intriguing and we’d like to think it will be used extensively by others in the future. It will be interesting to see whether other World Bank catastrophe risk pooling facilities, such as the Pacific Islands facility, try to issue cat bond notes as part of their next reinsurance renewal too.
Read more about this innovative World Bank catastrophe bond deal here: