AIR Worldwide Corporation has announced it has provided risk modelling and analytical services for more than USD3bn in insurance-linked securities to date this year, nearly 70 per cent of all new issuance.
'Catastrophe bond issuances have increased significantly since 1997 when AIR modelled the first large-scale catastrophe bond, Residential Re, which provides reinsurance for USAA,' says David Lalonde, senior vice-president at AIR Worldwide. 'Since then, AIR has modelled all eleven Residential Re transactions, including the most recent one in 2007 for USD600m.'
This year AIR has provided support for insurance-linked securities that provide protection against a wide variety of potential dangers worldwide. In addition to hurricanes, earthquakes and severe thunderstorms in the US, the firm has modelled catastrophe bonds covering earthquakes in Japan, winter storms in Europe, and severe thunderstorms and earthquake in Canada.
AIR also modelled the first catastrophe bonds covering California wildfires and US 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 collateralised debt obligation.
The company says catastrophe bonds are an increasingly attractive alternative to traditional reinsurance and retrocessional cover and their structures are becoming more innovative. An example is Nephila Capital's Gamut Re, 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.
'AIR's underlying modelling methodology and risk analysis expertise were crucial in achieving the tranche ratings within this new structure,' says Nephila partner Barney Schauble, 'and the credibility of AIR's model results with the investor community was extremely important.
'Equally important to the success of the transaction was AIR's responsiveness. Despite the complexity of this vehicle, they delivered analysis results and materials for the offering circular within the scheduled time-frame, and will be an integral part of the ongoing reporting.'
A key element of the rating process for catastrophe bonds is the risk modelling. AIR performs the underlying analysis used to determine the level of risk inherent in the transaction, and provides support for the offering circular and for the investor and rating agency meetings.
'AIR's role does not end with the modelling of individual bonds,' Lalonde says. 'Insurers, reinsurers, hedge funds and other catastrophe bond holders use AIR's Catrader, the industry standard platform for catastrophe reinsurance, to assess the risk to their portfolios of catastrophe bonds of all trigger types, as well as industry loss warranties and other instruments.'
AIR also provides investors with the tools to understand the risk including documentation on the models, modelling assumptions, what-if analyses of historical events, and breakdowns of risk by region and peril.
Earlier this month Acuance, a member of the Credit Suisse group, licensed Catrader and Alert, AIR's online real-time loss estimation service, to enable it better to assess and manage the risks associated with its portfolio of catastrophe bond investments.
'Catrader is the only true option for quickly and accurately modelling the risk associated with insurance-linked securities,' says Niklaus Hilti, head of insurance-linked strategies at Acuance. 'We selected Catrader because the catastrophe models that underlie the software enable us to generate loss estimates for a wide range of our investments and allow us to efficiently model and simulate our investment portfolios.'
AIR catastrophe models simulate the physical characteristics of natural and manmade hazards and project their effects on residential, commercial and industrial property. Financial institutions use Catrader to determine potential loss distributions for individual catastrophe bonds and their entire portfolio, as well as to quantify the correlation between bonds.
'AIR offers a wide range of highly sophisticated, scientifically-based models,' Hilti says. 'We've been particularly impressed with AIR's European windstorm model. It is easy to become too focused on hurricane and earthquake risk and underestimate the loss potential from storms like Kyrill, which caused large losses in Europe in January.'
Yörn Tatge, managing director of AIR Worldwide in Munich, adds: 'As the market for catastrophe bonds has matured, investors have become much more sophisticated. Catrader is the system of choice for hedge funds and other financial institutions to evaluate the risk associated with catastrophe-related financial instruments.'
In conjunction with Catrader, Acuance will use Alert, which provides catastrophe loss information in real time. 'Alert will play an important role in our 'live cat' decisions, when actual events are unfolding,' Hilti says.
Based in Boston with offices across North America, Europe and Asia, AIR was founded in 1987 to provide risk modelling software and consulting services to insurance, reinsurance, corporate and government clients. Using the latest science and technology, AIR models natural catastrophes in more than 40 countries as well as the risk from terrorism in the United States. Other areas of expertise include seismic engineering analysis and property replacement cost valuation.