A.M. Best's Methodology: Gauging the Basis Risk of Catastrophe Bonds.OLDWICK, N.J. -- A.M. Best Co. has released its methodology, Gauging the Basis Risk of Catastrophe Bonds catastrophe bond A debt security with a payoff tied to the relative severity of a natural disaster such as a hurricane or earthquake. Bondholders are paid with insurance premiums but may have to accept reduced principal repayment in the event the specified , which describes the criteria for estimating the basis risk of catastrophe bonds and determining the amount of reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. credit that can be claimed by the sponsors of such bonds. Hurricane Katrina  Editing of this page by unregistered or newly registered users is currently disabled due to vandalism. and other recent catastrophic events have made investors more cautious about the type of triggers they will accept in catastrophe bonds. Investors have been shying away from indemnity catastrophe bonds and gravitating towards index-based parametric See parametric modeling, parametric symbol and PTC. catastrophe bonds. (For the purposes of this press release, we consider non-indemnity catastrophe bonds as parametric catastrophe bonds). A.M. Best believes that parametric catastrophe bonds come with "basis risk" that must be considered in the Financial Strength Ratings of the companies sponsoring the bond issues. Basis risk, in the context of catastrophe bonds, generally reflects the possibility that a catastrophe bond may not be partially or fully triggered (for covered perils) even when the sponsor of the catastrophe bond has suffered a loss. The methodology outlines some of the factors that A.M. Best considers in estimating how much basis risk is inherent in parametric catastrophe bonds, and it also helps A.M. Best determine how much reinsurance credit will be given to the insurance/reinsurance companies that sponsor catastrophe bonds with parametric triggers. The methodology focuses on two distinct ways of measuring basis risk based on: 1) a scoring table that includes both quantitative and qualitative factors; and 2) the impact of the parametric catastrophe bond on the aggregate exceedance ex·ceed·ance n. The amount by which something, especially a pollutant, exceeds a standard or permissible measurement. Noun 1. curve of the sponsoring company. For more information on A.M. Best's Rating Best's rating A rating A.M. Best Co. assigns to insurance companies based on the company's ability to meet its obligations to its policyholders. Methodologies or to download To receive a file transmitted over a network. In any communications session, "download" means receive, and "upload" means send. The download/upload often implies a big/little scenario, in which data is being downloaded from the "big" server into the "little" user's computer. a copy of this full methodology report, visit http://www.ambest.com/ratings/methodology.html. A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com. |
|
||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion