PCS Catastrophe Designation in Indemnity-Triggered Catastrophe BondsBy Joe Louwagie | February 21, 2014
Indemnity-triggered catastrophe bonds are increasing in popularity, but it’s clear that the insurance-linked securities (ILS) community wants some degree of third-party validation in them. The number of sponsors using PCS® for catastrophe designation in indemnity triggers grew in 2013, with three sponsors adopting the approach in four transactions. Together, those issuances accounted for more than $1 billion in fresh capital.
Catastrophe designation has always been a concern in indemnity-triggered catastrophe bonds. The bonds can fairly easily address some types of events. A hurricane, for example, may require designation by a third party such as NOAA. The designation for an earthquake or tornado can be by magnitude. Other types of catastrophes, however, are not so easy to define. For thunderstorms, winter storms, and wildfires, for example, there’s no government agency similar to NOAA that says what events constitute a single catastrophe. For that reason, indemnity catastrophe bond sponsors are increasingly turning to PCS for independent, third-party catastrophe designation.
When a catastrophe bond uses PCS catastrophe designation in an indemnity trigger, all claims associated with a relevant PCS catastrophe serial number count toward the attachment and exhaustion points. PCS uses a variety of factors to designate a catastrophe — for example, whether the event causes at least $25 million in insured losses and affects a significant number of insurers and insureds.
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