Belmont launches Caribbean catastrophe protection product.
–16 April 2008
Belmont Risk Solutions Limited (Belmont), the British Virgin Islands based specialty (re)insurance broker and risk consultancy firm, has announced the launch of a new product, the Caribbean Government Insurance Bond (CGIB) that will offer Caribbean governments an alternative to the World Bank’s Caribbean Catastrophe Risk Insurance Facility (CCRIF).
Belmont’s managing director, Simon Owen, confirmed that they had been working closely with a major investment bank to offer a highly-liquid and transparent catastrophe bond, designed to offer protection to both governments and private stakeholders in the event of a significant natural disaster. They further advised that they had received considerable interest from number of Caribbean governments, some of whom were CCRIF participants.
Commenting on this latest development Owen said: “The concept of our product is very different to the CCRIF. Given the damage that member countries of the CCRIF sustained last year as a result of a major earthquake and hurricanes Dean and Felix, a number of eyebrows were raised at the low level of payments received.
“With that in mind, we felt that the diversity of the region alone creates a significant basis for providing an alternative to address the bespoke needs of countries in the Caribbean.”
The product is designed to offer a similar level of liquidity, but does not contain the complex layers of parametric triggers associated with the CCRIF. Owen said: “It has been specifically structured to include simple, easily identifiable triggers that will allow for significant payments within three business days of the requirements being met. Whilst the level of damage inflicted by natural disasters can be devastating, the detrimental effect of a resulting economic downturn can be even greater in the long-term. The CGIB creates the ability for both public sectors and private stakeholders to access the protection, meaning the related payments will help repair the country’s infrastructure and provide local businesses with valuable cash-flow to ensure the economy is not disastrously affected. It can also provide aggregate-exposed local insurers with access to liquid capacity that is not available in the traditional reinsurance market.”
Owen also advised that Belmont was also in the process of finalising other non-traditional products that will offer protection to industries and companies with significant catastrophe exposures in the region.
The European Commission’s Solvency II Directive, scheduled to take effect in 2012, is expected to substantially increase regulatory capital requirements for most European insurers, although no extra capital is likely to be required for the market as a whole.
AM Best’s report on Solvency II also describes other implications for the industry, including how the new solvency regime will:
• Result in more efficient allocation of capital, enhanced product design and risk-adequate pricing.
• Increase the pressure for consolidation, especially among small to medium-sized insurers.
• Likely benefit larger insurers with sophisticated internal models, as internal models are shown to provide for a 15% to 25% lower capital requirement than that by the standard formula of QIS3.
• Increase demand for reinsurance, securitisation of liabilities and hedging, especially for insurers highly exposed to capital-intensive, long-term products and for smaller insurers using the standard formula for calculating the capital requirement.
• Create a risk-management-oriented culture, leading to a better-capitalised, more efficient and transparent European insurance industry.
• Improve the competitiveness of EU insurers, both inside and outside the EU insurance market, although harmonisation of EU and non-EU (so-called third countries) regulation and cooperation among these supervisors remains a challenge.
An area of concern is the consistency of Solvency II provisions with those of the International Financial Reporting Standards (IFRS), which are not yet final. The parallel development of the two standards will possibly result in inconsistencies.
Among the most crucial aspects for the broader success of Solvency II is the clarification of group capital diversification effects related to the non-EU (re)insurers, but this is likely to be a contentious point for the future. The U.S. insurance industry also does not appear convinced that the approach — which combines Solvency II regulation with IFRS — is correct
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