The so-called “live cat” market has come to life, albeit perhaps tentatively, as hurricane Matthew’s approach towards the U.S. has increased the certainty of what looks set to be a relatively major impact (at this time) with a number of ILW’s trading and as much as $100m of limit placed, Artemis understands.
Sources in the insurance-linked securities (ILS) and reinsurance broking community explained to Artemis that interest in livecat trading actually first emerged almost a week ago, when one large industry loss warranty (ILW) was transacted, as a protection buyer saw the potential for hurricane Matthew to pose a significant threat to the U.S.
Update 11:20 BST / 06:20 ET, Oct 6th 2016: Hurricane Matthew has the potential to trigger outstanding catastrophe bonds and other ILS structures, based on latest forecasts, but significant uncertainty remains and exactly how close the storm gets to making landfall could wildly sway the eventual insurance and reinsurance industry loss.
Update 08:00 BST / 03:00 ET, Oct 6th 2016: Hurricane Matthew is battering the central Bahamas, with sustained winds of 115mph, higher gusts, torrential rain and a storm surge estimated at anything up to 15 feet. Matthew is then forecast to intensify again and head for Florida, where the outlook is worsening for the state.
Update 15:20 BST / 10:20 ET, Oct 5th 2016: Hurricane Matthew has the potential to be a significant loss event for the insurance and reinsurance industry. It could also cause issues to some catastrophe bonds, eroding aggregate retention and increasing their attachment probabilities, according to Ben Brookes of RMS.
That protection buyer may have been prescient, as no doubt prices for that ILW protection will have risen in recent days as the forecast path for hurricane Matthew has become increasingly targeted on a close pass or even direct hit on Florida and the certainty in the forecast has increased.
Live cat (or live catastrophe) trading occurs when an active catastrophe event, typically a hurricane or typhoon, is developing and insurance, reinsurance and ILS players can trade and structure transactions based on the potential for an impactful loss to occur.
Live cat trades are typically a way for a company with significant exposure in a region to buy extra protection, just in case the worst happens. That is likely the scenario that occurred last week with that single, supposedly large ILW trade, a player with a major stake in Florida just shoring up its coverage.
Interest in live cat trading increased again yesterday, we’re told, as hurricane Matthew’s forecast track shifted repeatedly westward with every update from the forecast models, until it now shows a very close brush with Florida as a still major Category 3 or stronger storm.
With the forecast for hurricane Matthew now showing this close encounter with Florida, followed by a slow passage up the Florida coast, before a curve slowly out into the Atlantic around Georgia and South Carolina, the potential for severe damage along that Florida coastline looks high.
We understand that another ILW was sold yesterday (Tuesday) as another protection buyer sought to lock in coverage at a price that has likely risen further today.
One broker representative told Artemis yesterday that the livecat market was particularly active over hurricane Matthew and that more than $100m in limit had been traded on the storm.
That is a significant amount, showing the serious manner in which the reinsurance and ILS market is taking the threat from hurricane Matthew.
Still this morning we understand that liquidity has not yet picked up in the secondary catastrophe bond market to any significant degree. There remains interest in selling, according to ILS market brokers, but few people are keen to buy at this time as prices will need to drop before that happens.
The current forecast suggests that while hurricane Matthew could be damaging for the Florida coastline, it is unlikely to cause the kind of industry loss that would trigger multiple catastrophe bonds at this time. Hence buyers remain scarce at pricing levels that are only slightly marked down still.
Any strengthening as the storm passes through the Bahamas and any further turn to the west could change that and at that point in time price expectations from sellers might drop further and more cat bond trading could occur.
We understand from sources that interest has also been shown in parametric triggers for live cat trading, something that makes a lot of sense, as a hedge can then be placed based on the potential for Matthew to cause wind speeds above a certain level on the Florida coastline.
For large, Floridian primary insurers, or reinsurance and ILS firms, with significant coastal Florida exposure, a live cat parametric wind hedge (likely in a catastrophe swap form) could be a very good solution to add an additional layer of protection as hurricane Matthew approaches.
It is at times like this, when a major hurricane approaches, that the value of an electronic platform for trading hurricane futures or options, either parametric or industry loss based, is apparent once again. There is still no way to easily and quickly purchase a transparent hedge against a hurricane like Matthew striking Florida and in 2016 that just seems wrong. Perhaps some enterprising insurance technology (Insurtech) start-up will solve that once and for all.
With some ILW’s already transacted, as much as $100m in limit placed on hurricane Matthew, interest increasing (according to our sources) and the forecast remaining bad for Florida, it seems likely that live cat trading may pick up again today.
Also read our previous articles on hurricane Matthew: