Catastrophe Modeling for Cat Bonds

By Rob Newbold  |  October 22, 2012

When a company is structuring a catastrophe bond, it's free to choose whichever modeling agent it deems best. As part of the evaluation process, the company doesn't take model results at face value, but instead places intense scrutiny on catastrophe model output. Such due diligence is, in some ways, the purest form of model evaluation in the industry today.

To date, AIR Worldwide (AIR), a Verisk Analytics company, has led the competition in providing catastrophe bond modeling services to companies seeking to participate in the insurance and risk transfer markets. In fact, AIR has been the modeling agent for 100 percent of all public, property catastrophe bonds issued thus far in 2012. AIR has extensive experience working with all trigger types and has modeled some of the most innovative structures in the market. The company's seasoned cat bond modeling team also has a sterling reputation for getting work done in a timely and thorough manner. And the stability of AIR model results assures both issuers and investors.

As the cat bond market continues to grow, sponsors will require tools to help them address the needs of investors (specifically, transparent settlement mechanisms) while still addressing their own risk and capital management concerns, including minimization of basis risk. Since the first cat bonds, we've seen that the market for such securities is not static. The most effective service providers will help the market evolve, through responsible innovation that makes risk transfer, smarter, faster, and easier.