The Next Big Thing in Indemnity Triggers

By Joe Louwagie March 27, 2014

As the first quarter comes to a close, it’s already clear that the 2014 catastrophe bond issuance year is starting off strong. It looks as though sponsors will complete around $1.2 billion in new transactions, surpassing the billion-dollar mark for only the third time in the market’s history. The big number — and significant year-over-year increase — is only one reason the first quarter of 2014 has been interesting. Among the trends poised to characterize the 2014 issuance year is the growing use of third-party catastrophe designation in indemnity-triggered catastrophe bonds.

Of the six catastrophe bonds listed in the Artemis Deal Directory (keeping in mind that some may not have closed and excluding private transactions), four have indemnity triggers and exposure to U.S. risk. Half of the transactions use  Property Claim Services® (PCS®) for catastrophe designation. The transactions produced $365 million in new limits. In all of 2013, four catastrophe bonds — representing approximately $1 billion in protection — used PCS for catastrophe designation. Time will indicate whether the momentum will grow in the second quarter.

Sponsors use PCS for catastrophe designation in indemnity-triggered catastrophe bonds to:

  • distinguish between catastrophe and noncatastrophe claims
  • mitigate moral hazard
  • demonstrate increased discipline to investors through the use of an independent third party (specifically, PCS)
  • remove ambiguity in event definition

For some perils, sponsors use alternatives to PCS, such as NOAA for tropical storms. For others, however, no equivalent alternative exists. That makes PCS catastrophe designation particularly important for catastrophes caused by perils such as wildland fire, thunderstorm, and winter storm.

To learn more about the role PCS can play in indemnity-triggered catastrophe bonds, please download Five Claim-Handling Considerations for Indemnity Bond Investors.

Joe Louwagie

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