The potential impacts of a second wave of the COVID-19 pandemic on mortality, as well as how vaccines and other factors play into this, was modelled for in the recent La Vie Re Limited (Series 2020-1) mortality catastrophe bond issuance, RMS has explained.
The successful issuance of the La Vie Re mortality catastrophe bond in October gave sponsoring life insurer, part of the Securian Financial Group, Minnesota Life Insurance Company a $100 million source of multi-year extreme mortality reinsurance protection from the capital markets.
Given the ongoing COVID-19 pandemic and the effect it has on mortality rates, it was critical for the potential for second and subsequent waves of the pandemic to cause elevated mortality rates to be well-modelled and explained to investors, as too were factors such as the way future COVID-19 vaccines would change the risk profile of the transaction.
All of these factors and more were taken into consideration during the risk modelling undertaken by RMS, to assist in helping insurance-linked securities (ILS) funds and investors understanding of the risks inherent in the La Vie Re mortality cat bond transaction.
RMS acted as the modelling agent for the La Vie Re Ltd. mortality cat bond transaction, providing a view of the risk covered by the bond to ILS funds and investors.
The risk modeller leveraged its excess mortality and morbidity risk models to derive a view of the risks involved for investors, which included analysing the potential effects of major events such as terrorism, earthquakes, other perils and, of course, pandemics.
RMS derived the contribution to the mortality cat bonds expected loss from COVID-19, including looking at scenarios related to second waves of the pandemic and how new vaccine development and use could affect projected mortality rates.
Jin Shah, Client Director at RMS, explained, “Using our life risk modeling capabilities, RMS developed an indemnity trigger on loss ratios and supported investors’ understanding of the risk, especially on the contribution from the current COVID-19 pandemic.
“The pandemic outlooks reflect the latest research on vaccine availability, efficacy and distribution, and how this may mitigate the impact of a second, winter wave of COVID-19 infections threatening regions where strict social distancing measures have been relaxed.”
Helping ILS fund managers and investors to understand how the pandemic could affect the mortality cat bond will have been critical in getting the deal successfully to market, at a price that was acceptable to pay for reinsurance coverage for the sponsor.
As well as analysing how COVID-19 could affect the mortality cat bond, RMS also helped in the construction of the innovative trigger used.
The La Vie Re mortality cat bond is the first indemnity-based 144A excess mortality bond.
In the past, mortality cat bonds have all utilised indices of excess mortality rates, but this transaction models the cedants’ portfolio on a loss ratio basis, covering Minnesota Life’s mortality exposures in the United States in a manner that is tied to its own claims experience as a result.
That provides a much better calibrated form of reinsurance coverage to the cedant and actually may have been critical also in getting the deal to market, as mortality indices may not have been readily updated to take into account the latest data and findings on COVID-19 spread, vaccines and other important factors.
Mortality catastrophe bonds remain relatively rare in the ILS market, only contributing a small amount of outstanding cat bond issuance these days.
Getting a mortality bond to market during a pandemic, to provide U.S. mortality reinsurance protection at a time when that country is facing perhaps the most serious implications of COVID-19 seen globally, is quite an achievement and testament to the work involved in this issuance, including the all-important risk modelling by RMS.
“Investors have warmly welcomed Securian Financial as a new sponsor to the ILS market. Likewise, RMS is pleased to support another new issuer secure reinsurance protection from the ILS market with a novel structure and trigger.
“It was a pleasure to collaborate with Securian Financial and Willis Re Securities and it’s great to see the ILS market continue to support innovation in the market,” Shah commented.