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Alternative Risk Transfers

COURT OF APPEALS AFFIRMS REJECTION OF CLAIMS RELATING TO CAT BOND

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We previously posted on a district court’s dismissal, with prejudice, of an Amended Complaint challenging the propriety of payments to the ceding insurer of the Mariah Re catastrophe bond which exhausted the cat bond’s trust account.  The Amended Complaint contended that the payment amount had not been calculated in accordance with the provisions of the cat bond’s documents, and that a lesser amount, which would not have exhausted the trust account, should have been paid instead.  The district court found that the documents clearly set forth the process for calculating the payment amount, and that the payment amount had been calculated in accordance with the contractual agreements.  It therefore dismissed the case with prejudice.  The Court of Appeal, after briefly describing the contractual relationships, simply stated that “[w]e AFFIRM the judgment of the district court for substantially the reasons stated by Judge Sullivan in his opinion of September 30, 2013.”  This result demonstrates the importance of clarity in the drafting of cat bond documents, and may help to reduce whatever uncertainty this lawsuit engendered in the cat bond market.  Mariah Re Limited v. American Family Mutual Insurance Company, No. 14-4062 (2nd Cir. June 30, 2015).

This post written by Rollie Goss.

See our disclaimer.

NAIC CONSIDERS PROPOSAL WHICH MIGHT EXPAND THE MARKET FOR CAT BONDS AMONG LIFE INSURANCE COMPANIES

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At the November 17, 2014 meeting of the Valuation of Securities Task Force of the NAIC’s Financial Condition (E) Committee, a proposal was received from the North American CRO [Chief Risk Officers] Council to modify the capital treatment for catastrophe bonds held by life insurance companies, to encourage life insurance companies to purchase cat bonds.  A slide presentation accompanied the proposal.  The proposal contended that a revised RBC treatment for cat bonds might have the following benefits:

  • property and casualty insurers would benefit from a larger and more stable source of capital, thereby reducing their cost of capital;
  • life insurers would benefit from improved risk-adjusted asset returns as natural catastrophe risk and systemic investment risk are largely uncorrelated and, as a result, can provide a diversification benefit;
  • a lower cost of capital for property and casualty insurers could improve the availability and affordability of insurance products, thereby benefiting property and casualty customers;
  • life insurance customers would benefit from improved risk-adjusted returns; and
  • regulators’ solvency concerns would diminish as greater diversification is introduced into the system.

The task force exposed this proposal for comment for a sixty day period expiring January 16, 2015.  It is not clear whether the Task Force will revisit this proposal at its March meeting.

This post written by Rollie Goss.

See our disclaimer.

SPECIAL FOCUS: ALTERNATIVE CAPITAL AND REINSURERS

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One hot topic in the reinsurance industry over the last year or two has been the influx and role of alternative capital.  In a Special Focus article titled Alternative Capital Proving That For Reinsurers, Size Does Not Matter, Bob Shapiro and Scott Shine explore some of the issues in this area.

This post written by Rollie Goss.

See our disclaimer.

SPECIAL FOCUS: DISMISSAL OF MARIAH RE CAT BOND LAWSUIT

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We posted previously on the Mariah Re cat bond lawsuit.  The court recently dismissed the Amended Complaint in that action with prejudice.  Rollie Goss discusses this opinion in a Special Focus article titled Cat Bond Litigation: Unambiguous Bond Documents Cause Court To Dismiss With Prejudice Complaint Seeking to Claw Back Payments Made From a Cat Bond Reinsurance Trust.

This post written by Rollie Goss.

See our disclaimer.

FASCINATING DEVELOPMENTS IN THE INSURANCE-LINKED SECURITIES AND LONGEVITY TRANSFER SPACES

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There are two interesting regulatory developments of interest to the insurance-linked securities space. First, the Securities and Exchange Commission is considering a proposed rule which would change the regulation of money market mutual funds under the Investment Company Act of 1940. One alternative being considered is to require funds to sell and redeem shares based on the current market-based value of the securities, i.e., that they transact at a “floating” net asset value per share. If funds in cat bond reinsurance trusts or more traditional collateralized reinsurance trusts were invested in such floating value instruments, the value of the collateral might decline and adversesly affect the amount of reinsurance or the amount of collateral available to a ceding insurer. However, the proposed rule exempts from the floating NAV requirement funds which are 80% or more invested in cash, government securities or fully collateralized repurchase agreements. The investment guidelines of most new cat bonds and collateral agreements would come within this exception, and the conservative investment of trust assets should avoid the potential adverse impact of the floating NAV requirement in the current proposed rule.

Second, the European Union’s Joint Forum, which is composed of the EU’s banking, insurance and securities regulators, has issued a report titled Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks (August 2013). This report describes the three types of transactions that are being used to transfer longevity risk: buy-out transactions; buy-in transactions; and longevity swaps or insurance. Given that the total global amount of annuity and pension related longevity risk exposure ranges from $15-25 trillion, understanding these risks, the alternative risk transfer methods of dealing with them and the views of regulators concerning such issues is important for anyone interested in the potential development of the equivalent of a cat bond market for longevity risks.

This post written by Rollie Goss.

See our disclaimer.