Contingent capital is an alternative form of capital or financing which can be triggered and made available under certain, specific pre-defined circumstances. It’s becoming a flexible way for companies to arrange a source of financing which is made available at precisely the times they need it. In the case of re/insurers contingent capital can come in particularly handy after major disasters and the resulting losses hit their balance sheets.
Last year French reinsurer SCOR’s natural catastrophe contingent capital facility was triggered after their losses from Q1 disasters reached the trigger point and allowed them to draw down $75m. Also last year, Allianz set up a contingent capital facility which would pay out to them should their solvency ratio drop below a pre-defined trigger point. This provides broad cover for many eventualities which could impact their solvency, including natural catastrophes, a major mortality event or even the sovereign financial crisis in Europe.
Now, in a recent interview with Bloomberg, reinsurer Swiss Re’s CFO George Quinn said that the reinsurer planned to issue contingent capital notes to help fund future growth. He said that it is seen as an efficient way of financing the firm. The reinsurer sold a 320m Swiss franc note to investors on 27th January apparently.
Quinn expressed a desire to issue contingent securities which would pay out, and inflict losses on investors, should capital buffers weaken internationally, according to Bloomberg.
It will be interesting to see whether contingent capital becomes a regular part of reinsurers risk transfer and risk financing routines, particularly if those contingent capital notes use triggers linked to their catastrophe claims experience. They could become a much broader way of securitizing catastrophe risk if investors are happy to accept the risks and returns.