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Cat Bond Lite: What’s Next?

In an interview with A.M. Best TV, Tom Johansmeyer, assistant vice president of Reinsurance Services, ISO, spoke about next steps in the insurance-linked securities (ILS) market.

With regard to where the market is headed, Tom remarked: “There’s a spectrum of innovation we’re looking at right now.” He noted that, on one end, innovation is increasing the efficiency of transactions. “Cat bond lite is a great example because what you’re doing is removing frictional costs and making easier, faster, nimbler risk transfer.” He also commented that at the other end of the spectrum, the market is ultimately looking for more growth.

Compared with catastrophe bonds, cat bond lite is a more streamlined approach to the securitization of risk. Because of their low frictional cost, these transactions can be done at a lower price and at a faster rate. According to Tom, “Think of it easily as a transformed industry loss warranty (ILW) or a transformed collateralized reinsurance wrapped in securities.”

Tom explained that the market is being tested in terms of deal size. The smallest he’s seen so far is $7 million to $8 million on the low end, and the highest he’s seen is $70 million — bigger than some 144a transactions.

Most cat bond lite transactions take approximately ten days to be completed. Tom said, “The next step is to further increase efficiency and the ability to execute tactically.”

Joe Louwagie

Joe Louwagie is assistant vice president, Property Claim Services (PCS). PCS is a Verisk Analytics (Nasdaq:VRSK) business.

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