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Towers Watson: Cutting Transaction Costs Can Bring New Cedents, Perils to Insurance-Linked Securities Market

Source: BestWeek - Meg Green

Posted on 01 Feb 2013 by Neilson

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Towers WatsonCincinnati Insurance Cos. has sponsored its first catastrophe bond, Skyline Re 2013-1, which provides $61.2 million in indemnity reinsurance protection against New Madrid earthquakes and severe thunderstorms.

The privately placed cat bond is an example of how reducing the usual costs of issuing cat bonds can make the insurance-linked securities market more accessible for new cedents, said Rick Miller, senior vice president at Towers Watson Capital Markets, which arranged the placement of the bond.

The one-year transaction transfers Cincinnati Insurance's New Madrid risk on a per-occurence basis and the thunderstorm risk on an aggregate basis. The bond would be triggered by one or both events, he said.

Towers Watson was able to cut the cost of the transaction by about 75% by not involving third parties, Miller said.

"The costs have been driven down because of the sophistication of the dedicated ILS community," Miller said. Investors themselves have access to catastrophe models, and did the work themselves, he said.

"Our approach is to bring new cedents and new perils to the marketplace, and the way we are doing this is by making the transaction more relationship-driven, and driving down the frictional costs of creating the bonds," said Michael Popkin, senior vice president at Towers Watson Capital Markets.

Lowering the cost of catastrophe bond transactions has made the market more affordable for smaller cat bonds to come to market.

In 2011, Towers Watson helped an unnamed Florida homeowners insurer bring a $11.95 million cat bond, Oak Leaf Re 2011-1, to the market through a private placement. A second bond for $22.78 million, Oak Leaf Re 2012-1, followed the following year. Both covered named hurricanes in Florida.

The Skyline Re transaction was well received by the market, Popkin said, because it brought both a new cedent to the marketplace and it brought diversifying risks (a majority of cat bonds are tied to U.S. hurricane risk).

Cincinnati Insurance Cos. is somewhat geographically concentrated with nearly 50% of its writings stemming from six states in the Midwest and Southeast, according to BestLink, A.M. Best's online financial system. This geographic concentration drove significant increases in weather-related losses in recent accident years, according to BestLink. The New Madrid Seismic Zone is located in the Midwest.