New York MTA uses ILS to create “tension” between reinsurance markets

Executives from New York Metropolitan Transportation Authority (MTA) and its captive insurance subsidiary, First Mutual Transportation Assurance Co. (FMTAC), have discussed how the entity utilises the capital markets to create tension and competition between markets when placing its reinsurance program.

The MTA’s 2017-2018 property reinsurance program is capitalised to the tune of $800 million via the use of international traditional reinsurance markets and the capital markets, which includes insurance-linked securities (ILS) and cat bond investors, as well as stand-alone investors.

During a recent MTA Board – Financial Committee Meeting, Director at the MTA responsible for insurance and risk management, Phyllis Rachmuth and Nora Ostrovskaya, a Director of Strategic Initiatives at the MTA, noted the benefits of utilising both marketplaces when placing its reinsurance program.

“The ability to obtain the capital markets based reinsurance has proved to be an economically successful alternative for FMTAC, because we are no longer solely dependent on traditional reinsurance,” said Rachmuth.

Participants in the two markets, being the traditional reinsurance markets and the capital markets, are often looking to provide very different risk coverage on programs such as this, explained the pair.

Traditional players, explained Ostrovskaya, are heavily regulated and are looking for “specific amounts of any kind of regional risk in their portfolio.” While capital markets investors, which is loosely split between hedge fund/pension fund style investors that are looking for high yield in a low interest rate environment, and specialist cat bond funds, are looking for diversification.

“So, what we are trying to do every year is to create this tension, create competition, both inside each market but also between the two markets,” said Ostrovskaya.

“Somebody who is looking for a specific risk profile can provide a better rate than somebody else who is not as interested. We are trying to match supply and demand. The traditional market is reasonably non-transparent, sometimes you see swings in the rates that traditional companies are trying to charge…so we are trying to move those offers around to obtain the best rate for the MTA,” she continued.

The top layer of MTA’s 2017-2018 reinsurance programme is where it looked to place its second catastrophe bond transaction, a $125 million parametric structured MetroCat Re Ltd. (2017-1) deal sponsored by the MTA on behalf of FMTAC, providing protection against New York storm surge (named storm induced) and earthquake risk.

Providing some details on this year’s programme in comparison to the previous year, Ostrovskaya said that eight investors participated in the top layer in 2016-2017, compared with seven participants and the MetroCat catastrophe bond issuance in the 2017-2018 reinsurance programme.

“MetroCat was placed in the capital markets where we had over 20 investors participating, so we were able to increase competition for that particular layer where we are able to push some traditional investors down into the tower where we needed more participation, more capacity and better rates.

“And we placed MetroCat at a very attractive rate in the capital markets because of the competition for risk that we were able to create,” said Ostrovskaya.

Although unconfirmed during the Board meeting, documentation on the MTA’s reinsurance program seen by Artemis shows that collateralised markets and ILS funds feature throughout the programme, as well as at the top end where MetroCat sits. Hence the capital markets and ILS are playing a much bigger role than just the $125 million MetroCat suggests.

MTA’s program and the insight from Rachmuth and Ostrovskaya highlights the benefits of utilising capital markets investors as well as traditional insurance and reinsurance as a way of obtaining the best rate possible for an entities risk transfer needs.

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