Modeling agent's risk analysis
The section of a cat bond offering circular where the independent modeler publishes attachment and exhaustion probabilities and expected loss, with its assumptions and sensitivity cases.
A cat bond investor cannot model a portfolio it does not see, and the sponsor has an interest in presenting its risk favorably. An independent modeler therefore runs its catastrophe model on the exposures the sponsor supplies and publishes, in an appendix to the offering circular, the attachment probability, exhaustion probability and expected loss of each tranche. It gives a base case and one or more sensitivity cases, for instance under a warm sea surface temperature assumption, along with a reconstruction of historical events on the current portfolio. These figures underpin the rating and the price, and later serve the annual resets. Their limit is the model's: they hold only for the exposure data supplied and the model version used, and the report says so in extensive disclaimers.
For Alamo Re (Series 2015-1), issued for the Texas Windstorm Insurance Association, AIR Worldwide calculated an annual attachment probability of 1.61 percent for the Class B notes, due June 2019; Fitch derived an expected rating of 'BB-sf', while the Class A notes, at 2.74 percent, received 'B+sf'.
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.