AIR Worldwide Corp. reports that it has provided risk modeling and analytical services for more than $3 billion in insurance-linked securities to date this year, or nearly 70 percent of 2007 new issuances.
So far in 2007 AIR says it has provided support for insurance-linked securities that provide protection against a wide variety of perils worldwide. In addition to hurricanes, earthquakes and severe thunderstorms in the U.S., AIR has modeled catastrophe bonds covering earthquakes in Japan, winter storms in Europe, and severe thunderstorms and earthquake in Canada. AIR also modeled the first catastrophe bonds covering California wildfires and U.S. winter storms.
The bonds have a variety of trigger types, ranging from indemnity, index and notional portfolio-based to a hybrid of several trigger types, including an actively managed Collateralized Debt Obligation (CDO).
“Catastrophe bond issuances have increased significantly since 1997 when AIR modeled the first large-scale catastrophe bond—Residential Re which provides reinsurance for USAA,” said David Lalonde, senior vice president at AIR Worldwide. “Since then, AIR has modeled all eleven Residential Re transactions, including the most recent one in 2007 for $600 million.”
Catastrophe bonds are an alternative to traditional reinsurance and retrocessional cover and their structures are becoming more innovative, according to Lalonde. An example of a novel transaction is Nephila Capital Ltd.’s Gamut Re, which is the first actively managed CDO catastrophe bond issued where the bond’s portfolio—comprised of currently traded catastrophe bonds, Industry Loss Warranties and reinsurance contracts—changes from day to day. Nephila will manage the bond and AIR will model the CDO on a quarterly basis as an independent reviewer.
Risk modeling is a key element of the rating process for catastrophe bonds. AIR performs the underlying analysis used to determine the level of risk inherent in the transaction. Additionally, AIR provides support for the offering circular and for the investor and rating agency meetings.
Source: AIR Worldwide Corp.
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