As our readers will be aware, we’ve written recently about the potential for the insurance-linked securities and catastrophe bond marketplace to absorb some of the oil industries risks related to large oil spills and the resulting pollution liabilities.
Our interest in this subject began in late June 2010 when, with the Deep water Horizon oil spill firmly in the insurance press, we wrote a speculative article suggesting that cat bonds could be used to hedge oil spill liabilities. We decided to revisit this theme last month and reached out to some of our industry contacts asking for their opinions on the subject. This resulted in a great article from Peter Nakada of RMS and some fantastic input from the likes of Willis Capital Markets & Advisory, Alternative Beta Partners AG and Standard & Poor’s which we published yesterday.
Late yesterday we were contacted by a new company which has been planning to tackle exactly this issue. They have already assembled a team which they believe gives them the capability to make this a reality and get oil spill risks transferred to the capital markets in catastrophe bond type ILS form. We’ve been under embargo until today due to their launch but can now publish some details of our discussion and their press release.
CatVest Petroleum Services LLC are a new venture, who officially launch today but have been in planning mode since mid 2010. In fact it transpired during our conversation that they were inspired to target this market after coming across our June 2010 article on the subject. They were delighted to read our more recent articles as well, as they feel it validates their thinking that this is a market just waiting to be made.
We spoke with Tim Reilly and Jake Walker, the two principals of CatVest Petroleum. Between them they have many years experience which is suited to the venture, with Mr. Reilly coming from an oil spill analysis and modelling background while Mr. Walker is a transactional attorney specialising in structuring ILS and derivative type instruments. They say that they have the world’s premier team of oil spill modellers at their disposal and are ready to bring transactions to market.
One of the more interesting points we covered was how CatVest Petroleum intended to address some of the issues that were raised by the only cat bond to cover oil industry risks, the troubled Avalon Re transaction. Mr. Reilly said ‘We have the largest oil spill datasets on the planet and by taking into account all the necessary variables including (but not limited to) location, type, size, spill fate and damage using decades of oil spill data we believe we have addressed the issues’. CatVest Petroleum intend to use their models to produce parametric triggers which can be utilised to issue cat bonds and ILS for oil spill risks.
CatVest Petroleum’s multiple capabilities of being able to structure and arrange transactions while also providing the risk modelling, trigger mechanisms and calculation tools puts them in a pretty unique position in the ILS space and makes them a really interesting company to watch. We will of course bring you any further news on this new company and coverage of any transactions that they successfully bring to market.
The full press release which CatVest Petroleum issued today is below.
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CatVest Petroleum Services LLC launches to transfer oil spill risks to the capital markets
16th August, 2011 – The oil industry is still reeling from the size of the liability claims that resulted from the Deep Water Horizon oil spill in the Gulf of Mexico. Historically the oil industry is underinsured and relies on self insurance to provide the financial means to pay for any major claims resulting from accidents and disasters.
The reasons for this lack of cover are many, but often it boils down to a lack of capacity in the traditional insurance and reinsurance markets and the annual premium cost. Insurance can be expensive for oil industry corporations and reinsurers are unwilling to take on too much of this peak risk. This leaves companies operating in the oil industry to rely upon state or international civil liability convention sponsored liability trust funds and self-insurance mechanisms.
CatVest Petroleum Services LLC believes there is another way. With years of experience in the insurance-linked securities, catastrophe bond, reinsurance and oil spill risk assessment sectors, the founders of CatVest Petroleum Services LLC believe that the time is ripe for oil companies to replicate the capital markets securitization vehicles often used by insurers to hedge catastrophe risks such as hurricanes and earthquakes.
Historically, issuers of insurance-linked securities (ILS) have packaged portions of their risk (usually in the hundreds of millions of dollars), transformed them into securities and then sold these securities to investors who bore the risk. The contracts have pre-set trigger parameters which if met, activate the protection and investors can lose their principal. Investors are willing to accept portions of this risk in return for attractive rates of interest in an asset class which has low correlation to the wider financial markets.
Given the current financial crisis insurance-linked securities are seeing huge tremendous appetite from large institutional investors seeking to access the asset class. However, traditional catastrophe bonds are not providing enough capacity leaving many investors frustrated and unable to access the market. During this volatile capital market environment, CatVest Petroleum Services LLC’s approach facilitates investors and issuers alike for transferring new types of risk such as oil spill liability into the marketplace. Having explored this opportunity with institutional investors it is clear that they would be willing to take on much larger amounts of oil spill risk than otherwise seen in previous ILS issuances.
CatVest Petroleum Services LLC is the only company focused on providing insurance-linked securities services to the oil industry, with over ten years experience in the ILS market and many years of experience structuring and arranging ILS associated transactions. Bringing the world’s premier team of oil spill damage claims, modeling, risk assessment and analysis experts together with ILS expertise, CatVest Petroleum Services LLC offers a one-stop shop to help oil, gas, chemical and shipping companies secure a new source of reinsurance cover from the capital markets. Our oil spill experts have created the world’s only oil spill risk model called SPILLRISK, which removes many of the uncertainties surrounding this type of disaster. By taking into account factors such as geographic location, proximity to sensitive areas of coastline as well as spill type, volume and spread, the SPILLRISK model is the only model able to accurately generate exceedance curves and loss probabilities.
CatVest Petroleum Services LLC’s world-leading SPILLRISK modeling system integrates decades of oil spill fate, effects and damage modeling to derive a robust parametric trigger which directly addresses moral hazard and adverse selection, and mitigates basis risk.
CatVest Petroleum Services LLC welcomes discussion with any firms having significant oil, gas, chemical and hazardous substances spill risks that are interested in first quantifying and then transferring these financial risk exposures to outside investors. Oil rig operators, pipeline operators, shipping tanker fleet owners and all other associated companies are also welcome to contact CatVest Petroleum Services LLC for further information or to initiate an engagement.
CatVest Petroleum Services LLC welcomes discussion with any insurers and reinsurers who hold significant amounts of oil, gas, chemical and hazardous substances spill risk and captive insurers having similar risks to transfer.
By transferring a portion of your oil spill risk to capital markets investors with CatVest Petroleum Services LLC’s modeling and risk transfer expertise, firms secure a diverse form of reinsurance cover, on multi-year terms which are fully collateralized and often significantly cheaper than traditional reinsurance. Uniquely in the risk markets, CatVest Petroleum Services LLC allows firms to achieve up to full oil spill risk transfer.