According to international ratings agency Standard & Poor’s (S&P) there’s greater potential for claims to be disputed when protection is purchased from a traditional reinsurance firm as opposed to a catastrophe bond.
Since insurance-linked securities (ILS) really started to expand and grow its influence across the insurance and reinsurance marketplace, reinsurers have often questioned its permanence, post-event reaction and also its ability to pay claims.
As covered by Artemis recently, a new report from S&P states that catastrophe bond investors are just as good at paying claims as traditional reinsurers, despite their relatively short existence and remaining untested against a really major loss event.
S&P discusses both the ability and willingness of the catastrophe bond space to pay claims, and explains that contrary to popular opinion there is greater uncertainty and potential for reinsurers to dispute claims.
“We see greater potential for contract uncertainty and disputed claims when cedants buy cover from a traditional reinsurer because of their practice of underwriting risks tailored to specific clients, sometimes without agreeing detailed documentation until after the policy’s inception,” said S&P.
“Reinsurers’ ability to dispute claims helps protect them from being taken advantage of by cedants, but can also affect a company’s reputation in the market and alter our assessment of its competitive position. Due to the contract uncertainty, the relationship issue becomes more important,” continued S&P.
Catastrophe bond contracts are legally binding before the coverage comes into effect, as in order for a cat bond to be broadly marketed to investors the documentation needs to be completed. Hence investors and ILS fund managers know what they are buying into and the risk of dispute should therefore be reduced.
S&P concludes that the catastrophe bond market has expanded rapidly since its inception, and that its ability to pay claims should be viewed as positive by the industry.