On July 16, FEMA launched its first catastrophe bond to transfer risk from the National Flood Insurance Program (NFIP) to the capital markets, reports the Artemis blog. This will be the first catastrophe bond to solely provide reinsurance coverage for flood risks.
FEMA is seeking $275 million of reinsurance protection from a FloodSmart Re Ltd. (Series 2018-1) issuance. FloodSmart Re, a Bermuda domiciled special purpose insurance vehicle, will seek to issue two tranches of notes that will be sold to insurance linked securities funds to collateralize underlying reinsurance agreements to cover a portion of the National Flood Insurance Program (NFIP) U.S. flood exposure.
The transaction will cover NFIP losses from flood events that are directly or indirectly caused by a named storm event impacting the United States and also Puerto Rico, U.S. Virgin Islands and District of Columbia.
The unfolding outbreak of the Ebola virus in the Democratic Republic of Congo may activate pandemic catastrophe bonds, said a recent Artemis blog post.
Last year, the World Bank launched a “pandemic bond” to support the Pandemic Emergency Financing Facility (PEF). The cat bonds are designed to payout when an outbreak gets to a stage where emergency aid financing would be required, enabling the mobilization of capital rapidly to help prevent further spread of any eligible disease outbreak.
Pandemic cat bond notes cover a range of pandemic perils including, Coronavirus, Crimean Congo Hemorrhagic Fever, Filovirus, Lassa Fever and Rift Valley Fever, with Ebola falling within the Filovirus category.
The current Ebola outbreak appears to be an eligible event under the terms of the transaction, although it’s probably too early for a formal announcement. The number of confirmed deaths remains well below the trigger point which can only begin to payout for a Filovirus like Ebola once the confirmed deaths pass 250.
Pandemics are one of the most certain uninsured risks in the world today, according to the World Bank site. There’s a high probability that the world will experience a severe outbreak in the next 10 to 15 years that could destabilize societies and economies. The annual global cost of moderately severe to severe pandemics is roughly $570 billion, or 0.7 percent of global income. The cost of a severe pandemic like the 1918 Spanish flu could total as much as 5 percent of global GDP.
Earthquake exposure is one of the biggest risks to workers compensation insurers, so it’s interesting to read that the California State Compensation Insurance Fund (SCIF) is once again looking to the capital markets to provide reinsurance protection for workers comp losses resulting from earthquakes.
This is a repeat of the first catastrophe bond sponsored by the SCIF in 2011 — Golden State Re Ltd sized at $200 million — which is due to expire in January 2015.
Artemis blog says:
The unique transaction, which has not been repeated by anyone else until now, links earthquake severity to workers compensation loss amounts demonstrating a new use of the catastrophe bond structure.”
The Golden State Re II catastrophe bond issuance is expected to be sized at $150 million or more, and will cover the SCIF until January 2019.
While the covered area is for earthquakes events across the United States, Artemis notes that as with the 2011 deal as much as 99.99 percent of the SCIF’s insurance portfolio is focused on California, so the risk is primarily focused on California-area earthquakes.
The new deal apparently carries a similar modeled loss trigger to the 2001 transaction, using the exposures of a notional portfolio of workers compensation risks in the SCIF portfolio, earthquake severity factors (ground motion), geographic distribution of the covered portfolio, types of buildings covered, time of day and the day of week an event occurs as some of the weighting factors.
An earthquake has to be magnitude 5.5 or greater to trigger the catastrophe bond, according to Artemis, and losses after an event will be modeled deterministically, so not related to actual injuries and fatalities, using the earthquake event parameters. This will be modeled against the notional portfolio using day/time weighting to determine an index value and notional modeled loss amount.
A 2007 report by EQECAT for the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) estimated California workers compensation insurers would pay annual losses of $180 million caused by earthquakes.
The report suggested that the losses would affect 15.6 million employees working during a major earthquake.
Check out I.I.I. facts and stats on workers compensation insurance.
Superstorm Sandy highlighted the enormous risk of storm surge along the Gulf and Atlantic coasts, so weÃ¢â‚¬â„¢re interested to read that the captive insurer of the New York Mass Transit Authority (MTA) has accessed the capital markets to cover it in the event of storm surge resulting from a named storm.
Artemis blog reports that this is the first time in the history of the catastrophe bond market that a transaction has provided cover just for storm surge:
Hurricane and tropical storm induced storm surge is included in many U.S. wind cat bonds, so it is not particularly diversifying, but it has never been structured into a cat bond as the sole peril in this way and is an interesting addition to the market that could spur more issuance of storm surge cat bonds. ItÃ¢â‚¬â„¢s another sign of the increasing maturity and flexibility in the cat bond market, as well as the increasing appetite investors are showing for catastrophe risk.Ã¢â‚¬
Artemis adds that the sponsor, the captive insurer of the New York Mass Transit Authority (MTA), has significant exposure to storm surge, as evidenced by the losses it faced from last yearÃ¢â‚¬â„¢s hurricane Sandy:
The MTA suffered a loss in the region of $5 billion from the storm, predominantly from surge due to flooded transit tunnels and subways, so it is encouraging to see it turn to the catastrophe bond market for a new source of reinsurance protection.Ã¢â‚¬
The $125 million catastrophe bond will be issued by First Mutual Transportation Assurance Co. (FMTAC), the MTAÃ¢â‚¬â„¢s captive insurer and sold via MetroCat Re Ltd, a Bermuda domiciled special purpose insurer.
Artemis says the deal offers protection against named storms that generate a storm surge event index that equals or exceeds 8.5 feet for Area A or 15.5 feet for Area B. Area A includes tidal gauges located in The Battery, Sandy Hook and Rockaway Inlet, while Area B includes tidal gauges in East Creak and Kings Point.
Business Insurance has more on this story.
Check out I.I.I. facts and statistics on catastrophe bonds.
As Hurricane Isaac hit the Gulf coast as a Category 1 storm, an interesting tidbit came across the wires regarding state-run property insurer Louisiana Citizens Property Insurance Corp.
In a press release, think tank R Street Institute noted that Pelican Re Ã¢â‚¬“ a $125 million catastrophe bond issued by Louisiana Citizens Ã¢â‚¬“ would be triggered if the storm produces more than $200 million in losses for the residual market entity.
If these conditions are met, Isaac would be the first storm ever to trigger a catastrophe bond issued by a state-run insurer.
Over at Artemis blog, there was more discussion:
Pelican Re does not cover pure flood damage so that is in its favour, however we believe storm surge caused by hurricane is covered and wind damage most certainly is. Louisiana Citizens has a great amount of exposure in the coastal areas where hurricane Isaac is currently making the greatest impact. As Pelican Re is an indemnity cat bond it is unlikely we will understand whether there has been an impact for some time as claims come in and losses to Louisiana Citizens are quantified.Ã¢â‚¬
An updated paper on the residual market property plans from the Insurance Information Institute (I.I.I.) notes that a growing number of plans are accessing the capital markets as part of their reinsurance strategy, bolstering their ability to fund losses during hurricane season.
As well as Louisiana Citizens, Florida Citizens also accessed the capital markets in 2012, issuing a $750 million catastrophe bond Ã¢â‚¬“ making it the largest single peril catastrophe bond in the history of the insurance-linked securities market.
They join a growing list that includes North CarolinaÃ¢â‚¬â„¢s Beach and Windstorm Plan and the Massachusetts Fair Plan.
For more information on the catastrophe bond market, check out this I.I.I. backgrounder on alternative risk-financing options.