Cat Modelers Juggle for Position

The influence of any single catastrophe modeling firm within insurance linked securities (ILS) only tells a piece of the market’s story, according to industry professionals.

While working on new cat bond issue is an important part of the industry’s business, many firms argue that modeling has become an integral part of the broader reinsurance and risk transfer markets.

Last month, Boston-based AIR Worldwide announced it had provided risk modeling and analytical services for over 80 percent of the $2.1 billion of catastrophe bonds issued to date in 2009. A press release said AIR has modeled the risk profile for eight securities covering North America and Europe.

But it’s difficult to measure the dominance of any single catastrophe modeling firm this year because the lack of issuance in the first three quarters of 2009 skews comparisons, says Karen Clark, president of Karen Clark & Company in Boston.

Clark says AIR always had a significant share of the market and the relatively low volume year will only amplify its lead. “It’s been the lowest year in terms of issuance in cat bonds since 2005,” she says. “With less actual capacity, the differences are really magnified.”

Some firms argue that since the books are not yet closed on 2009, it’s too early to say which catastrophe modeling firm dominates the catastrophe bond space.

“While RMS cannot comment on details for client confidentiality reasons, the strong flow of deals in the pipeline means the market share for providing risk analysis will change considerably by year-end,” says Peter Nakada, director of capital markets for RMS.

For Eqecat, dominance in ILS does not automatically mean dominance in catastrophe modeling.

“The risk transfer techniques range from retention, traditional reinsurance, collateralized reinsurance, swaps, 144A securitized transactions (“Cat Bonds”) and OTC trades,” says a Eqecat spokesman. “Globally, about 90 percent of the catastrophe risk transfer is accomplished through retention and reinsurance, and about 10 percent through other methods.  Of this 10 percent, about half is through 144A transactions.”

Choosing the Results They Want

When it comes to choosing a cat modeler for a catastrophe bond, several factors influence the decision.

Clark argues that there are usually four factors that go into the selection of a catastrophe modeling firm: speed of analysis, flexibility, price and model results. 

She explains that since catastrophe bonds usually have a short window between the time a deal is structured and when it is marketed, firms will look for modelers that can move quickly. Issuers and banks will also need the modeling firm to be flexible enough to customize their analyses since “each transaction has its own flavor,” Clark adds.

Additionally, while price is not the first determinant of picking a catastrophe modeler, issuers will look at cost before hiring a firm.

While an issuer may use a single firm for any one transaction, typically they will have the benefit of results from multiple models. “They will choose the results they want to use,” Clark says. “Whichever model is more efficient and cost effective.”

Most modeling firms are expanding beyond their traditional catastrophe bond market work.

Nakada says RMS is not only focused on modeling capital markets transactions, but is moving into new business areas.

Last year, RMS launched an ILS portfolio management platform called Miu that allows investors to analyze a catastrophe bond and the impact it would have on their portfolio.

Additionally, the company is expanding its development of parametric risk indices to include new risks. Nakada says that RMS is extending its Paradex index suite — which covers U.S. hurricane and European windstorm — to include U.S. earthquake.

“RMS RIskMarkets’ strategic focus is on providing the infrastructure to facilitate growth in the ILS market – expert risk analysis is only one piece of the puzzle,” Nakada says.

Great! You’ve successfully signed up.

Welcome back! You've successfully signed in.

You've successfully subscribed to Risk Market News.

Success! Check your email for magic link to sign-in.

Success! Your billing info has been updated.

Your billing was not updated.