The expansion of the catastrophe bond market in recent times encouraged Insurance Australia Group (IAG) to sponsor its first transaction, which, according to the firm’s Executive Manager of Reinsurance Operations, Nick Hartry, complements its existing reinsurance arrangements.
With a first time sponsor in IAG and the first deal to be issued using a Singapore Special Purpose Reinsurance Vehicle (SPRV), Orchard ILS Pte Ltd entered new territory when it launched in February this year.
The deal provides its sponsor with AUD $75 million of annual aggregate reinsurance protection against Australian catastrophe risks, and while the insurer has studied the cat bond space for some time, Orchard ILS Pte Ltd is its first transaction.
“We have studied the cat bond market for over 10 years and have utilised collateralised reinsurance as an important part of our Catastrophe Reinsurance programme since 2012.
“With the growth of the cat bond market in recent years and expansion of coverage we felt that the time was right to complement our traditional and collateralised reinsurance placements with a cat bond issuance,” explained Hartry, in a recent interview with Artemis.
For some time, Singapore has been looking to establish itself as an insurance-linked securities (ILS) domicile. Singapore already had SPRV legislation in place, and in an effort to encourage the development of a local ILS and cat bond hub, announced an ILS grant designed to fund 100% of the upfront costs of issuing bonds in the domicile.
Hartry told Artemis that IAG has had a reinsurance presence in Singapore since 2006, and during this time has built a strong relationship with the Monetary Authority of Singapore (MAS).
“When MAS formed an ILS working party we were keen to be part of it in order to explore opportunities for Singapore to become a base for the issuance of ILS transactions. This led to MAS launching an ILS grant scheme in late 2017.
“We were keen to take on the responsibility of being the first to utilise the scheme and issue a catastrophe bond, knowing it would be a ground-breaking development for the market,” said Hartry.
Typically, being the first is never easy, and while the issuance of a traditional 144A catastrophe bond transaction has been described as overly cumbersome, Hartry explained that working with the new regulation was a positive experience.
“We worked very closely with MAS and our advisors to overcome hurdles as they arose. We found MAS to be extremely proactive and focussed on enabling the transaction to take place. I would also recognise our home regulator, the Australian Prudential Regulation Authority (APRA). They were very supportive of our approach to this transaction,” he said.
Continuing to stress that while the issuance of a catastrophe bond is likely to become easier with time and experience, “it is still far more complicated than a traditional or collateralised reinsurance placement.
“The volume of documents that attach to the issuance of a cat bond is significant and I would encourage the market to strive for ways to further simplify the paperwork required. This would undoubtedly encourage more first time sponsors to the market,” said Hartry.
Orchard ILS Pte Ltd is the latest catastrophe bond transaction to expand the remit of the ILS space, opening up an Asian domicile while at the same time bringing another Australian sponsor to the market.
Furthermore, the deal brings additional peril diversification to the ILS investor community, which, according to Hartry, were supportive throughout the process.
“We were careful to choose investors who were long term partners of ours, knowing that they would work alongside us throughout this pioneering transaction,” said Hartry, adding that these same investors have supported IAG’s catastrophe aggregate protection for many years, “meaning we did not need to engage a third-party modeller.”
IAG is the latest to join a growing list of insurers and reinsurers that utilise the catastrophe bond and ILS space to augment and complement their reinsurance operations, and Hartry underlined the fact that a cat bond is another tool the firm can leverage to enhance its protection.
“The cat bond provides us with a diversified form of reinsurance, which now gives IAG an additional option in any future reinsurance transactions. This could be within our aggregate program or within another part of our catastrophe reinsurance program,” he said.
Looking forward, it will be interesting to see how Singapore develops as an ILS domicile, and whether it can now attract further catastrophe bond issuances, as well as broader ILS transaction activity.