Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

EQECAT puts Typhoon Guchol insured losses under $500m. Catastrophe bond losses unlikely


Risk modeling firm EQECAT has published a report on typhoon Guchol which made landfall in Japan on the 19th June. Guchol was the fourth named storm of the Pacific typhoon season and the first to officially reach super typhoon status. Maximum wind speeds from typhoon Guchol reached as much as 130 knots but the storm weakened as it approached land and was downgraded to a Category 1 storm as it made landfall.

At the time Guchol began to impact the Japanese mainland wind speeds had reduced to 70 knots average, however rainfall levels were the main concern as the storm crossed Japan and impacted major cities such as Kyoto and Tokyo. The Kinki and Tokai regions of Japan recorded rainfall rates of of 25-50mm per hour (1-2 inch per hour) as the storm made landfall. Rainfall rates in the Tohoku region, north of Tokyo, were about 10-50mm per hour. There were some evacuation orders in place for central, eastern, and northeastern regions of Japan and a number of international and domestic flights were cancelled. There were also delays and cancellations on the transport network such as high-speed trains and road closures in several regions.

EQECAT has estimated the amount of insured losses caused by typhoon Guchol to be below $500m.

Another tropical cyclone, Talim, is currently heading towards Japan and while Talim is expected to dissipate before making landfall there it will bring further heavy rainfall with a risk of further flooding.

Typhoon Guchol is not expected to have caused significant enough damage to pose a threat to any catastrophe bonds with Japan typhoon as a covered peril. There are a number of outstanding cat bonds with exposure to typhoon losses in Japan, including the recently issued Akibare II Ltd., August 2011’s Kizuna Re Ltd., Montana Re Ltd. (Series 2010-1) and Vega Capital Ltd. (Series 2010-1).

Of these cat bonds both Akibare II and Kizuna Re are single peril Japan typhoon cat bonds, while Montana Re 2010 and Vega Capital 2010 are multi-peril deals.

The Vega Capital 2010 deal, a $106.5m cat bond, uses a parametric trigger and records losses on an annual aggregate basis, it also uses a cash reserve account  buffer which faces losses first. At this time it’s assumed that Guchol will not have been powerful enough to breach the parametric trigger, but it is possible that some modeling will have taken place after the storm made landfall.

Montana Re 2010, a $210m cat bond, is also triggered on a parametric basis but the typhoon exposure is on a second event and annual aggregate basis, so no loss would be seen by this cat bond.

Kizuna Re is a privately issued $160m cat bond on behalf of sponsor Tokio Marine. This is an indemnity cat bond and details were scarce due to the private placement of the transaction. We don’t know the terms of the deal and how exactly it triggers but at this stage feel it unlikely that it would have been structured in such a way that a typhoon of this magnitude would have triggered the cat bond. Usually cat bonds would provide cover targeted at the most severe of typhoons, which Guchol was not.

Finally the recently issued $130m Akibare II cat bond. This deal is interesting as it uses a modelled loss trigger and covers both wind and flood losses from typhoons. The risk modeling looks at various factors of the storm such as location, central pressure and precipitation data and calculates an index value to see if it breaches the attachment trigger point. Clearly we have no way of knowing whether this deal will have been impacted yet, but again we feel it unlikely as the storm has not caused the level of losses we’d expect to see a cat bond triggered by.

As you can see, there is some exposure to Japanese typhoons in the cat bond market, perhaps more than some might think. However if these deals have all been structured effectively we feel it unlikely that Guchol would give any cat bond investors cause to worry. We’ll update you if any information emerged that changed that view.

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