Discussion of the Insurance-Linked Securities 

Market for Terrorism Coverage

Presented at a meeting of the Advisory Committee on Risk-Sharing 

Mechanisms (ACRSM) by John Seo 

June 1st, 2016 
I. ILS MARKET SNAPSHOT 

II. ESTIMATE OF ILS MARKET TERRORISM CAPACITY 

CONTENTS 2 
I. ILS MARKET SNAPSHOT 

■ ILS MARKET GROWTH 

■ CAT BOND ISSUER MIX 

■ CAT BOND INVESTOR MIX 

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ILS MARKET GROWTH

Source: Fermat Capital, Guy Carpenter, Aon Benfield, Trading Risk Magazine and Artemis.bm. Data as of 31 December 2015. 

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■ 7 out of the top 10 US insurance companies 

■ 7 out of the top 10 global reinsurers 

■ 3 of the top 3 government catastrophe pools worldwide* 

■ Florida Citizens (70% of insured residential risk “on the beach” in South Florida) 

■ California Earthquake Authority (70% of insured residential risk in California) 

■ Turkish Catastrophe Insurance Pool (100% of insured residential risk in Turkey) 

■ 55 sponsors: 

 ̈ 42 Insurers /11 Reinsurers/ 2 Corporates 

 ̈ 14 of 55 issuers are governmental entities 

 ̈ 5 first-time issuers in 2015 

CAT BOND SPONSOR MIX

Source: Fermat Capital and A.M. Best. As of 31 December 2015. *These government pools self-report themselves as being in the top 3 worldwide. 

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■ Majority of investors are outside of the U.S., though U.S. investors have been active since 

the beginning of the cat bond market and remain strong with promising future growth. 

■ Significant presence of global top 20 national pension funds and sovereign wealth funds. 

■ Growing participation from ultra-high net worth and multi-family offices, private wealth 

investment advisors, charities, small-to-medium pension, endowment and insurance 

companies. 

■ Typical cat bond allocations, when they occur, are 1–4% of total assets under management 

(AUM), with 1–2% of AUM the most typical. 

■ ~25 core investment managers (most often specialist ILS managers) manage ~75% of the 

cat bond market. ~125 non-core investment managers (e.g., life insurers, fixed income 

mutual funds, endowments) manage the remaining ~25% of the cat bond market. 

■ These ~150 investment managers represent thousands of end investors through mutual 

funds and tens of millions of pension fund members through separately managed 

accounts. 

CAT BOND INVESTOR MIX

 Sources: Fermat Capital, Trading Risk Magazine and Artemis.bm. 

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II. ESTIMATE OF ILS MARKET TERRORISM CAPACITY

■ CAT BONDS EXPOSED TO TERRORISM RISK 

■ OBSERVED CAT BOND TERRORISM CAPACITY 

■ ESTIMATE OF ILS MARKET TERRORISM CAPACITY 

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■ Golden Goal Ltd. US$260 million in business interruption coverage for FIFA’s 2006 World 

Cup. Issued October 2003. Matured October 2006. Libor + 1.50% coupon. 

= Terrorism was the major consideration in this bond.

= Other natural perils were included in the coverage as well.

= Brought to market only 2 years after 9/11. 

= No renewal as traditional market capacity responded. 

■ Extreme mortality/morbidity bonds. General class of cat bonds, providing coverage to life 

reinsurers/health insurers for extreme mortality/morbidity developments in countries such 

as the US, UK, Germany, France, Italy, Switzerland, Japan, Canada and Australia. Average 

Coupon 3mo Treasuries + 3.18% (outstanding bonds as of 1 June 2016). 

= Terrorism is a minor consideration in these bonds; however,...

= Terrorism risk is explicitly stated and frequently modelled in the offering circular. 

= First brought to market only 2 years after 9/11. 

= Commonly renewed as a complement to traditional market capacity. 

CAT BONDS EXPOSED TO TERRORISM RISK 6 
OBSERVED CAT BOND TERRORISM CAPACITY

Source: Fermat Capital, Guy Carpenter, Aon Benfield, Trading Risk Magazine and Artemis.bm. Data as of 31 December 2015. 

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■ Two, main assumptions used for estimate: 

= ILS market ex-cat bonds are at least as accepting of terrorism exposure as the cat bond 

market. 

= Fermat Capital’s capacity for explicit terrorism risk is similar to the aggregate of 

investors in the cat bond market. 

■ Summary of observations: 

= Cat bond terrorism exposure observed at ~5 to 13% of outstanding bonds. 

= Fermat Capital has additional capacity of 5% of AuM for explicit terrorism risk. 

=ILS market size is currently ~$70 bn. 

■ Estimate of current ILS market terrorism capacity: 

= ~$3.5 to 9 bn of capacity for terrorism exposure. 

= ~$3.5 bn of additional capacity for explicit terrorism exposure. 

ESTIMATE OF ILS MARKET TERRORISM CAPACITY 6