The increased use of indemnity triggers in catastrophe bonds is well documented, but it’s a trend within this development that demonstrates the continued maturation of the catastrophe bond market. The use of PCS® data for independent catastrophe designation continues to rise, showing a growing commitment to standardized event definition.
In 2013, three sponsors used this approach in four transactions amounting to approximately $1 billion. Last year, the number of indemnity-triggered catastrophe bonds using PCS for designation grew 25 percent to five, with four sponsors raising $800 million in capital with this approach.
With PCS catastrophe designation, only claims assigned a PCS catastrophe number count toward attachment and exhaustion points. This approach provides an independent third-party perspective and offers protection against moral hazard. Some investors may find those benefits attractive. PCS catastrophe designation can be particularly useful for perils such as thunderstorms, tornadoes, or wildfires, where another third-party standard is not available.
For PCS to designate an event a catastrophe, it must generate an industry insured loss of at least $25 million and affect a significant number of insurers and insureds. The PCS team reviews 40 to 50 events each year in the United States that have the potential to become catastrophes and designated 32 catastrophe events in 2014.