The Handbook of Insurance-Linked Securities
The closest thing to a cat bond reference; several chapters on structure and triggers.
Summary
The reference has not verified this book in detail; the summary states only what the title, author and subject establish.
Barrieu and Albertini edited a collection of contributions on insurance-linked securities, covering the instruments, the modelling and the market as it stood around 2009. The reference has not verified the individual chapters.
The subject covers the transfer of insurance risk to capital markets. Catastrophe bonds are the principal instrument: an issuer, typically a special purpose vehicle, sells notes whose principal is at risk if a defined event occurs, and the proceeds are held in collateral to pay either the sponsor's claim or the investors' return. Trigger structures determine what counts as the event, and each involves a trade-off between basis risk for the sponsor and transparency for the investor: indemnity triggers pay on the sponsor's actual losses, industry index triggers on aggregate market losses, parametric triggers on measured physical characteristics such as wind speed or ground acceleration, and modelled loss triggers on the output of an agreed model run on the event's parameters.
The modelling material covers catastrophe models supplied by a small number of vendors, the estimation of exceedance probability curves, and the difficulty of validating models for events with thin historical records.
Other instruments covered include sidecars, industry loss warranties, mortality and longevity bonds, and life insurance embedded value securitisations.
The market has developed substantially since 2009, including sustained growth in issuance, the entry of pension funds as investors, losses from the 2017 hurricane season and from wildfire events, and repricing after those losses. Readers should verify market structure and pricing conventions against current sources.
Key takeaways 7
- Catastrophe bonds place principal at risk against a defined event, with proceeds held in collateral rather than depending on a counterparty's credit.
- Trigger design trades basis risk for the sponsor against transparency and speed for the investor.
- Parametric triggers pay quickly on measured physical characteristics but may not match the sponsor's actual loss.
- Catastrophe models from a small number of vendors determine pricing across the market, which concentrates model risk.
- Historical data on rare catastrophic events is thin by definition, so pricing rests on models rather than on experience.
- Insurance risk is largely uncorrelated with financial markets, which is the basis of investor demand for the asset class.
- Capital markets can absorb catastrophe exposure in amounts that the reinsurance industry's own capital cannot support.
Who should read it
Practitioners and allocators in insurance-linked securities who need the technical reference, verified against current market conditions.
Where it sits in the reference 3
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