Thanks to Aon Benfield we are able to bring you a recent interview with Liz Frederick the Director and Global ILS Practice Group Leader within the Aon Captive & Insurance Management division. The interview was originally published in Aon Benfield’s recent Q1 2013 insurance-linked securities and catastrophe bond market report, which we covered in some detail in an article discussing the doubling of catastrophe bond investment returns.
We thought it would interest our readers, who may have missed the report and interview, to read some thoughts from an area of the catastrophe bond and ILS market which does not receive as much coverage, the administration of transactions. Liz Frederick’s team is heavily involved in the management and administration of reinsurance entities including ILS and cat bond issuing special purpose insurers and vehicles.
The interview in full follows below.
1. Could you give us an overview of ACIM, its services and yourself?
As a business unit within Aon Global Risk Consulting, ACIM specializes in the formation and management of re/insurance entities worldwide, including protected and incorporated cell facilities, special purpose vehicles, specialist insurance and reinsurance companies, and captives. The team comprises more than 450 experts globally and is entrusted with the management of over 1,100 re/insurance entities across 23 domiciles. ACIM is a separate and distinct team from Aon Benfield Securities, which specializes in the planning, structuring, capital raising, and execution of ILS transactions.
Several years ago, ACIM recognized significant growth opportunities across the ILS industry and the synergies between the expertise and skill-sets needed to manage these vehicles and its existing business model. ACIM’s primary objective is to provide innovative and flexible ILS management solutions to its clients by offering a full range of management services that are delivered by a multi-disciplined team of professionals intimately familiar with all aspects of ILS structures including the formation, on-going administration, claims management and liquidation cycles.
Currently, we manage a variety of structures including SPVs/SPIs, hedge fund-backed reinsurers, and transformers, which issue or invest in a variety of products including cat bonds, ILWs, and collateralized reinsurance across both the P&C and life markets. We also offer ILS investors the opportunity to utilize the White Rock Group, which comprises Aon-owned protected cell, incorporated cell and segregated account companies in Bermuda, Gibraltar, Guernsey, the Isle of Man and Malta.
In October 2012, I joined the ACIM team to provide further support and direction to the ILS management initiative. In my career, I have overseen the management of over 50 catastrophe bonds in both Bermuda and the Cayman Islands, several of which have experienced trigger events, and I have worked with teams on several sidecars, and have assisted with the development of services provided through segregated account transformers. I am currently responsible for growing the ILS insurance management business and ensuring best practices are utilized across all of our ILS domiciles, including Bermuda, the Cayman Islands, Dublin and Guernsey.
2. What obstacles do you face as the administrator in a cat bond transaction?
Prior to a transaction closing, the biggest challenge we face is managing the expectations of different deal teams and ensuring that transaction timelines are upheld. We pride ourselves in removing execution risk wherever possible in our role, and, therefore, we take a very proactive approach towards managing these transactions. Additionally, over the years, we have had the pleasure of working with many different structuring teams and deal counsels, and they each have had their own traits which define how a transaction is run. We have found that it is exceptionally helpful to have a strong working relationship with all of the deal teams in the industry, as we can anticipate, where possible, any bottlenecks before they occur, and ensure we work around any potential issues.
Post close, the biggest challenge we face is in managing the unexpected. This is where the true value of an experienced insurance manager comes in to play. Having worked on the majority of transactions which have triggered since 2005, I can assure you that while the basic mechanics are built into the underlying deal documents, these vehicles do not run on “auto-pilot”. We are lucky to have a diverse and experienced ILS team within ACIM, all of whom bring different skills and expertise to strengthen the team as a whole. This ensures we are well-resourced to manage the known and the unknown, no matter what the situation.
3. How does the role of the administrator help to make a difference in a transaction?
Based on events over the past several years, it is clear that administrators have an opportunity to educate the market on the importance of our role and the importance of having an experienced team managing transactions during the life of a deal. It is easy to overlook this value if one assumes a transaction will not be triggered. Through the events of the last several years, from Katrina to the financial crisis to the Tohoku Earthquake and tsunami event, we have learned to be nimble and, therefore, it is imperative that cedants, investors and deal teams alike understand the experience and skill set of the administration teams in the market. Only then can they select those who have a broad basis of knowledge and expertise in the ILS industry.
Separately, it is important that the deal teams, the cedant, and the investors in any individual transaction have confidence in the abilities and expertise of the administrator, as we are the party that has been appointed to run the SPV/SPI after the notes are issued and after the reinsurance contract is executed. Through our experiences with an extensive subset of the ILS market, we have learned the value of having a diverse internal management team made up of accountants, legal specialists, insurance experts and claims management professionals, who have an in-depth understanding of the mechanics of the transactions and strong relationships within the ILS community. The ACIM team takes a very proactive approach towards the management of the vehicles during the entire lifecycle of a deal; whether it is ensuring that routine premium payments occur, managing a potential claim, or handling the loss of a primary service provider.
4. Could you walk us through the steps of the administrator’s role in bringing a cat bond to market?
Upon appointment, we work with the deal teams to understand the transaction specifics, the parties to the transaction, and the transaction timeline. As the administrator, we will be involved very early on in the process, working with local counsel to ensure the new SPV/SPI becomes incorporated and licensed in accordance with the deal schedule. Prior to closing, as we often provide at least one director to the board of the SPV/SPI, we will review all of the transaction documents and provide feedback where appropriate. While we work with the deal teams to ensure we fully understand the intent of the structure and ensure this is captured in the documents, our primary focus is on the execution of the intent. Our goal is to add value to each transaction on which we are appointed, based on our past experiences with other deals, pointing out best practices, and what works and doesn’t work from a day to day perspective. This helps to provide a different viewpoint to the deal team.
5. Five years from now, how will the cat bond issuance process have changed from ACIM’s perspective?
It is the responsibility of all parties involved in the ILS industry to ensure that any transaction brought to market benefits both the cedants and the investors, and that the terms and conditions of the deal are appropriate based on the intent of all parties. Since the financial crisis, we have seen an increased interest in the robustness and transparency of ILS structures, and an increase in information being made available to investors. Additionally, we have seen an increased focus on the corporate governance of the ILS vehicles. I expect this will continue over the next several years and, as a result, we will likely see additional changes to the structures. One of the most exciting aspects of this industry is the innovation and the pace with which it adapts to the needs of the cedants and investors. I expect this to continue, and I am excited that our ACIM team has the opportunity to participate in developing these changes.
We hope you found this insight into the administration and management of catastrophe bonds, ILS and reinsurance entities interesting. You can download and read the full Q1 2013 ILS and catastrophe bond market report from Aon Benfield via its press release.