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RMS Delivers Risk Analysis for First Ever Storm Surge Catastrophe Bond

Posted on 01 Aug 2013 by Neilson

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RMSRMS, the world's leading catastrophe modeling firm, today announced that the company delivered the risk analysis for the first ever storm surge catastrophe bond, issued on July 30, 2013, through MetroCat Re Ltd.  To conduct the analysis, RMS used its North Atlantic hurricane model version 13.0, also announced today, the only hurricane model in the industry that quantifies risk from catastrophic hurricane-driven storm surge throughout the full lifecycle of a storm.

The bond, MetroCat Re Ltd. Series 2013-1, is the first catastrophe bond that solely covers storm surge risk. The bond is sponsored by First Mutual Transportation Assurance Company, a New York State-licensed captive insurance company and subsidiary of the Metropolitan Transportation Authority (MTA). The bond transfers $200 million of catastrophic storm surge risk to the capital markets, providing the MTA with financial protection against storm surge risk arising from future named storms.

"In the aftermath of Superstorm Sandy, the traditional avenues we use for insurance and reinsurance contracted dramatically, making it exceedingly difficult for the MTA to obtain insurance," said Thomas F. Prendergast, MTA chairman and CEO. "We anticipate that this deal represents the start of a long-term alternative reinsurance option that diversifies MTA's risk management strategy."

The MetroCat parametric index allows MTA to efficiently access capital without requiring investors to underwrite the infrastructure of the MTA.  The index proxies MTA exposure to elevated water levels, using measurements at five key tidal gauge locations in the New York metropolitan area. The RMS model - used to perform the risk analysis  - dynamically simulates the interaction between a storm system and the ocean throughout the entire lifecycle of each hurricane to determine the resulting on-shore surge.

The model was accepted with enthusiasm from investors involved in the deal and is another example of continued RMS momentum as the go-to provider for intelligently structured insurance-linked securities. The bond also proves that corporates and municipalities can raise funding through the capital markets with unique transactions like catastrophe bonds.

 "The RMS approach of full-lifecycle hydrodynamic modeling is the only way to capture Hurricane Sandy-like experiences, where surge loss far exceeds wind loss," said Peter Nakada, managing director, capital markets at RMS.  "Our model indicates that there is a 20 percent chance that a U.S. hurricane will cause more damage from surge than from wind, which rises to 40 percent along the northeast coast of the United States."