2009-11-24
By Editor, CIR
Swiss Re has launched a $75m mortality bond, which includes cover for H1N1. The agreement covers a five-year risk period starting in the issuance year and ending in 2014. Vita IV, in turn, has issued notes linked to this risk into the capital markets. The notes are rated BB+ by Standard & Poor's.
CUO at Swiss Re, Brian Gray, commented: "This Vita transaction will help us to manage our exposure to peak mortality risk in a capital efficient way, to meet increased client demand for extreme mortality risk protection and, ultimately, to position us for further growth."
This is the first time an excess mortality securitisation has been structured using a probabilistic catastrophe model rather than solely relying on historical data and is unique in covering an existing event -- the H1N1 flu pandemic -- that already poses an insurance risk.
The new excess mortality bond was structured using a probabilistic catastrophe model, part of the work for which was conducted by Risk Management Solutions (RMS). Pandemic flu risk was assessed using the their Infectious Disease Model, which was first released in 2007. A specific model for the ongoing H1N1 pandemic was also incorporated, taking account of possible mutations and antiviral resistance.
"Catastrophe risk models allow us to capture extreme events impacting today's population which are not adequately addressed by historical data," commented Dr. Maura Sullivan, epidemiologist in the emerging risk solutions division at RMS. "Even though infectious disease scenarios in the model may share the same viral characteristics as past pandemics they are not mirrored by the same medical conditions, as we can look at factors like today's vaccine development and government response measures, which will dramatically affect mortality rates." The model scenarios are developed using scientific data and mathematical and empirical models, as well as the experience of epidemiologists, virologists and medical doctors.
"While insurance linked securities had a slow start in 2009, the Vita bond demonstrates that interest in this asset class is alive and accelerating and there's appetite for new approaches to modeling risk for transactions covering perils like pandemic flu," said Peter Nakada, managing director of RiskMarkets, RMS' insurance-linked securities team.
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