Catastrophe reinsurance is simply insurance for insurance companies and provides protection against natural catastrophes. Reinsuring catastrophe risk can help insurance companies manage earnings volatility and reduce the amount of capital needed to support their exposures. The amount of notional exposure that trades in the catastrophe reinsurance market each year is approximately $200B.
There are various segments of the reinsurance market and Nephila almost exclusively focuses on property catastrophe risks exposed on a worldwide basis to natural perils such as earthquake, hurricane and winter storm. This risk is transacted on reinsurance documentation and predominantly falls into the following three categories: 1) Direct reinsurance, 2) Catastrophe Bonds (cat bonds) and 3) Industry Loss Warranties (ILW). We are also participants in the Retrocession market.
Direct reinsurance is the most traditional form of risk transfer in the market, where an insurance company buys catastrophe protection from a reinsurance company. Coverage in the direct reinsurance market is provided on an indemnity basis, unlike ILWs which are trigger off an index of industry claims. Direct reinsurance is generally transacted using a reinsurance contract and this market is by far the largest method of risk transfer for catastrophe exposures at an estimated $150B notional transacted annually. The vast majority of participants in the direct reinsurance market are rated insurance and reinsurance companies, although specific collateralized layers are becoming more common.
County-Weighted Industry Loss Warranties
An innovative form of catastrophe reinsurance cover transacted on a private basis. Similar to an ILW in that losses trigger off of a PCS trigger, but exposures are then disaggregated at the county level, to match the insurance counterparty’s specific exposures. This has the effect of significantly reducing the counterparty’s basis risk when compared to buying standard ILW cover, while for investors the potential for long claims development periods is reduced.