Swiss Re Insurance-Linked Fund Management

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Operational Re cat bond helps Credit Suisse RWA capital position


Investment bank Credit Suisse’s Operational Re Ltd. ILS transaction, which saw a catastrophe bond structure used to secure insurance via the capital markets for its operational risk exposures, has helped the bank to reduce its risk weighted assets (RWA’s) by 1.25 billion Swiss Francs, according to a report.

The transaction saw Credit Suisse sponsoring the insurance-linked bond issuance, with insurer Zurich providing the operational risk policy underlying it. Zurich retained a portion of the risk, but the majority was ceded to the capital markets as a way to secure the necessary reinsurance to underpin the risk transfer.

The Operational Re deal settled at  a size of CHF 220m (around $223m), with the risk retention held by insurer Zurich being finalised at CHF50m, so making the total operational risk insurance coverage secured CHF270m. Full details are available in our Deal Directory entry for the Operational Re Ltd. transaction.

One of the reasons for tapping capital market investors and the ILS fund market for the reinsurance layer was an inability to secure traditional reinsurance cover to underpin the policy, according to sources and documentation seen by Artemis.

So it’s testament to the ability of the ILS market and its investors to provide attractively priced, flexible risk transfer solutions that Credit Suisse has reported a significant drop in its risk weighted assets for a unit protected by the Operational Re cat bond coverage.

According to Global Capital writer Owen Sanderson (article here, you may need to register to view), the insurance coverage provided by Zurich and backed by the Operational Re bond has helped Credit Suisse’s Global Markets unit cut its risk weighted assets by an impressive CHF1.25 billion.

Regulatory disclosures explain that the operational risk cover helped the investment bank to reduce its risk weighted asset calculation under its capital requirements. However, Sanderson cautions that the Basel Committee could close off this route to reducing capital requirements in the future.

The bank’s disclosure explains; “The decrease in operational risk was driven by internal methodology and policy changes in Global Markets relating to the removal of the FINMA imposed cap on the benefit from the insurance policy purchased in Q2 2016.”

FINMA, the Swiss financial regulator, had approved the insurance policy within Credit Suisse’s capital model, enabling it to benefit from better capital treatment by having shifted certain operational risks off its balance sheet.

Risk transfer and the use of the capital markets as a source of efficient insurance capacity therefore helped Credit Suisse improve its capital position, while also shifting the risk to ILS investors.

But new Basel rules agreed recently could see this option disappearing for banks, Sanderson writes, although he does note that this will take considerable time to implement and that the Credit Suisse bond could have matured before the change happens.

It’s likely that banks, brokers and other structuring firms will be looking at the impact the Operational Re bond had on Credit Suisse’s capital position and thinking how to replicate this with the use of insurance risk transfer and the capital markets, particularly if a way that avoids being removed by the Basel changes to capital models can be found.

That could be an opportunity for the ILS fund market and its investors to back more of these kinds of transactions, if operational risks can be structured in ways that don’t just remove risk, but also enhance capital position.

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