I sometimes pinch myself someone as financially sophisticated as Mr CLS posts with us on Yahoo Allstate. Before I get to his post there is one concept that must be understood in reinsurance. Under traditional reinsurance the ceding party (such as State Farm) gets to take a credit on their balance sheets for the risk transferred to the reinsurer for the amount of reinsurance purchased. A problem with Cat Bonds is the lack of specific attachment points in loss payments (unlike traditional reinsurance) means the collection of the cat bond trust proceeds is de-coupled from the amounts actually paid to the insureds for their losses making it possible for an unsavory insurer to both collect for losses via the Cat bonds and stiff their insureds.
So what happens when traditional reinsurance is then backed by Cat bonds for a homeonwers policy which was also bundled and sold via securitization (think life settlements)? Mr CLS asked that exact question this morning and as per usual he followed the money to Bermuda:
Securitization for HURRICANE risks ABOVE the Hurricane Storm Surge water line.
“If I couldn’t differentiate between wind and water, I could NOT pay”, said adjuster Matthew Thiele.
The final version said “When the investigation indicates that the damage was caused by excluded water and the claim investigation does not reveal independent windstorm damage to separate portions of the property, there is NO COVERAGE available under the homeowners policy.
So where is the “Transfer of risk” through securitization?
What was the “credit” taken on liability balance sheets or off balance sheets for this transfer of risk?
Would a balance sheet credit be taken (say in the securitized HO policy of Bossier) for:
a) $2,300 (the initial payment loss)
b) $93,480 (the supplemental payment 4 years later)
c) $650,000.00 (the full policy limits)
These HURRICANE securities provide $90 million of retrocessional coverage to ARROW RE, a wholly owned Bermuda reinsurance subsidiary of Goldaman, Sachs & Co. Arrow Re has reinsured a $100 million portion of an excess-of-loss treaty covering STATE FARM Group (State Farm) policies, primarily homeowners, in Florida. This securitization represents a 90% cession of that risk to the holders of the securities. Continue reading “Lets connect the damages verdict in Bossier to reinsurance, securitization via cat bonds and global finance”