These days, one would be hard-pressed to find an area of the capital markets that has not been influenced by CDO practices, in one way or another. Now the reinsurance and capital markets industry has SelectCat, a product developed to guide the reinsurance and capital markets in hedging and pricing risk on certain managed portfolios they mean to protect.
Launched last week, SelectCat aims to give capital market providers interested in insurance risks more data transparency and better risk exposure control, plus sustaining access to potential customers for sellers. The hybrid product is similar to a CDO, because it incorporates a basket of underlying contracts. Unlike a pure index, SelectCat incorporates a synthetic tranche within the basket, and does not gear off of the basket's exact results, David Priebe, head of Guy Carpenter & Co.'s specialty operations.
"After Hurricane Katrina, we recognized the need for a more proactive approach to securing capacity in the property retro market and began to look at new, index-based approaches," Priebe said.
Guy Carpenter, which is a risk and reinsurance specialist, developed the index after Hurricane Katrina devastated the Gulf Coast region in 2005, when claims tested the capacity of the insurance and reinsurance market. Guy Carpenter is part of the March & McClennan companies. For capital markets purposes, SelectCat allows retrocession reinsurers and other capital providers to access portfolios of insurance risks that fit their tolerance levels. The portfolio approach reduces the concentration of and operational risks associated with writing a single catastrophe program. Also, SelectCat could potentially allow retrocession reinsurers to take on insurance risk in a business environment influenced by legislation that passed in Florida in January. State lawmakers voted to double the capacity of the Florida Hurricane Catastrophe Fund, a move that some expect to diminish demand for catastrophe bonds and take capacity out of the private reinsurance market. SelectCat, its promoters said, would enable reinsurers to rebalance their risk profiles rather than offloading them proportionally.
"Conventional wisdom has dictated that retrocession comes with a high degree of uncertainty and that buyers ought to pay much higher - sometimes irrationally higher - prices to compensate for this uncertainty," Priebe said.
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