Seven Cat Bond Lite Benefits You Should UnderstandBy Tom Johansmeyer | April 10, 2015
Last year, $500 million in private catastrophe bonds came to market, nearly half of them publicly announced. In the first quarter of 2015, approximately $200 million in “cat bond lite” transactions were completed, and the rapid growth of this structure suggests the speed, flexibility, and tactical benefits are resonating with the insurance-linked securities (ILS) community. Download our new report to learn more about cat bond lite and why it has become so important. Key issues include:
1. Speed: Cedents can take a cat bond lite from idea through execution in as few as ten days (once the risk piece is in place).
2. Flexibility: Risk bearers can use “lites” to allocate capital, lay off risk, and rebalance their exposures without having to rely solely on the secondary market or new issuance pipeline.
3. Liquidity: The underlying contract may be a traditional industry loss warranty (ILW), but the fact that it is securitized can help attract capital providers and also facilitate secondary trading later.
4. Low frictional costs: The cat bond lite structure offers a streamlined approach that obviates the need for some of the costs involved in a traditional catastrophe bond.
5. New entrants: Already, the participant base has expanded, and many other ILS market players have been eyeing the cat bond lite sector in recent months.
6. New risk-bearer types: If use of the structure reaches further down the risk and capital supply chain, adoption could grow much faster.
7. New markets: Insurers and reinsurers in regions with smaller risk transfer requirements could access capital markets capacity via cat bond lite. Canada, for example, comes to mind.
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