Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Earthquake in Turkey could threaten Ianus Capital Ltd. catastrophe bond


We’re sure that most of you will be aware of the magnitude 7.2 earthquake which struck eastern Turkey yesterday causing numerous buildings to collapse and reports of as many as 239 deaths and 1,300 injuries (the latest from the BBC here). There have also been a series of powerful aftershocks which have caused further damage to buildings badly shaken by the main earthquake itself. It is the largest earthquake to strike Turkey since 1999, when a quake killed around 1,000 people.

Turkey has a catastrophe insurance pool designed to help pay claims from events such as this. The Turkish Catastrophe Insurance Pool (TCIP) is the benefactor of some catastrophe bond cover through the 2009 Ianus Capital Ltd. cat bond which Munich Re issued. So there is a risk that cat bond investors could face a loss from this earthquake event if the level of claims were sufficient to trigger Ianus Capital.

The Ianus Capital cat bond was a small issuance in June 2009 which saw Munich Re issued €50m of notes to gain protection from European windstorms and Turkish earthquakes. The Turkish earthquake component of the deal was issued specifically for the catastrophe pool (TCIP) and Munich Re acted as a transformer to facilitate the deal.

The deal provides Munich Re, and hence their client the TCIP, with three years or per-occurrence coverage for earthquakes across Turkey on a modelled loss basis. The trigger for the earthquake portion of the Ianus Capital cat bond was used a modelled notional loss index on a notional reinsurance portfolio of property insurance risks across Turkey. This means that a modelled loss portfolio will have been constructed so that it can be run through the risk modellers software should an event occur. There will be a point where the modelled loss amount triggers the transaction and causes a either a partial or full loss.

This means that Ianus Capital can be triggered based on the modelled loss experience of the Turkish Insurance Catastrophe Pool (TCIP) and their reinsurance contract with Munich Re.

It could take some time before we really understand whether Ianus Capital has been affected or not. The transaction states that there are 35 calendar days for an event report request to be submitted to the risk modelling agency (in this case EQECAT), then there are 110 business days before the event report has to be submitted. It’s only at this point in time that the actual impact of the earthquake to Ianus Capital investors will be fully understood, and as we all know claims development from earthquakes caan be a slow business.

We’ll update you if and when any further information becomes available on whether this earthquake in Turkey has triggered or caused a loss to the Ianus Capital cat bond.

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