Contact: Cary Schneider
212-669-9200
Date: March 13, 1997
BOSTON, March 13 - The market for the securitization of catastrophe risks will continue to evolve as participants gain experience through trial and error.
"Looking ahead over the next ten years, the capital markets will be firmly established in this area with reinsurers as the 'packagers' of risk," said Ray Dowling, Integrated Reinsurance Risk Management.
Dowling told the annual Ratemaking Seminar of the Casualty Actuarial Society that in the future ceding companies will utilize integrated catastrophe management programs composed of reinsurance, securitization and the use of contingent equity/liquidity to manage their catastrophe portfolio.
"Eventually, securitization will go beyond 'high severity - low frequency' areas" and be applied to other risks such as personal auto within a given geographic area," Dowling said.
Dowling conceded that it appears there have been far more seminars, articles and research papers on the securitization of catastrophe exposure than completed deals. "Now, we're starting to move from conceptual discussion to actual deals in the markets," he said.
The fact that rating agencies have developed approaches to rate securities and the California Earthquake Authority finally has become operational should help accelerate securitization programs, said Dowling.
Most importantly, Dowling observed, "investor education and communication on the nature of the risk remains critical" to enhance the deal making process, explaining that the lack of common language, understandings and practices between the investment community and insurers and reinsurers is an inhibiting factor.
The capital markets today are viewing securitization in a more positive light as a result of several factors, including the need to diversify, stable interest rates and an appetite for new products, said Dowling.
At the same time, he noted that softening catastrophe reinsurance rates and the absence of a recent mega-catastrophe are among the factors slowing market development.
Joseph R. Lebens, Tillinghast - Towers Perrin, pointed out that "historical results are unreliable to use in evaluating the spectrum of outcomes" from a natural catastrophe for a number of reasons, such as the infrequency of actual events and insufficient record keeping.
"Computer models have been built, not to predict the future, but to evaluate possible scenarios," he said.
The simulation models develop insured loss estimates using the actual exposure data of the insured risks with specific fields varying based on the event peril, according to Lebens.
These variations include line of business, amount of insurance., location, construction type, year of construction occupancy type and number of floors.
"Catastrophe model output is ideal for use in financial models used to evaluate securitization contracts," he said, because it determines aggregate insured losses for wide spectrum of events, assigns a likelihood and applies frequency distribution to estimate annual aggregate insured loss amounts.
In fact, he said that "sophisticated financial models have been built so that securitization products can be easily evaluated."
These financial models, such as the Securitized Insurance Risk Evaluator, developed by Towers Perrin Reinsurance, utilizes loss scenarios from a catastrophe model and interest rate scenarios from an interest rate model to project the performance of the security as well as its impact on the investors overall portfolio.