2015-04-14 - By Oskar Schyberg

Cat Bond Lite Brings New Sponsors to Market

Cat Bond Lite is an exciting development in the Cat Bond sphere. By enabling smaller entities to transfer insurance risks to the capital markets, new sponsors can utilize the mechanism and to investors it promises further investment and diversification possibilities.

Historically, the costs of structuring a cat bond deal have been prohibitive for smaller sponsors. As a result, cat bond issuances have typically been very large and, thus, unavailable to smaller sponsors, left to the traditional reinsurance market.

cat bond lite grows fastAs a response to the lack of cat bond issuances in 2009-2010, the Credit Suisse subsidiary Clariden Leu created a novelty issuing a ”Cat Bond Lite” in 2010, with an index-based trigger and a guaranteed liquidity for the bonds, covering losses up to USD 20 million for an industry sponsor. Essentially, the deal demonstrated a standard formula for structuring small cat bond deals.

Despite an ongoing discussion in the industry, development was somewhat slow until 2014, when the Cat Bond Lite market exploded, with deals generating $329 million of new risk capital in 14 deals recorded by Artemis.bm. These were structured on four more or less standardised platforms (Kane, Market Re, Tokio Tensai and Kaith Re). An interesting aspect it that at least one of these agents, Kane, lists every deal on the Bermuda Stock Exchange, all but guaranteeing liquidity for the bonds. Of course, the number of deals and the market volume can (and most likely is) essentially larger, as the sphere of listed cat bonds is only a subset of the much larger market of private placements.

The development of Cat Bond Lite also entailed somewhat of a revival of index based triggers, as these are readily available, are standardised and obliterate the need for bespoke trigger mechanisms.

To investment managers and investors alike, this is an interesting development, as it opens up for new sponsors and show promising prospects for bringing new perils to the market, further facilitating diversification and ensuring a long term market balance between demand and cat bond issuance.

For further reading on the topic, check out what Tom Johansmeyer, a leading proponent of the development of Cat Bond Lite, has to say, not least his post “Seven Cat Bond Lite Benefits  You Should Understand“.

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Oskar Schyberg

Oskar Schyberg


Licentiate of Engineering degree in applied/financial mathematics. At Entropics since December 2013.

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