Collateralised Reinsurance
A private reinsurance contract where the reinsurer (typically an ILS fund) posts 100% of the limit as cash collateral upfront.
Collateralised reinsurance is a private reinsurance contract in which the reinsurer — typically an ILS fund — posts 100% of the policy limit into a trust account at inception, eliminating counterparty credit risk for the cedant. Unlike traditional reinsurance backed by a rated balance sheet, the cedant knows the money is there from day one.
Collateralised reinsurance contracts are structured similarly to traditional excess-of-loss or quota share treaties, and can be written on an indemnity basis (tied to actual losses), removing the basis risk that affects parametric cat bonds. The illiquidity premium makes collateralised reinsurance generally higher-yielding than cat bonds of comparable risk.
ILS funds typically access collateralised reinsurance through Lloyd's syndicates, fronting carriers, or direct cedant relationships.
Example usage
“The ILS fund wrote $200m of Florida collateralised reinsurance attaching at a 1-in-30 year return period.”
Frequently asked questions
What is Collateralised Reinsurance?
A private reinsurance contract where the reinsurer (typically an ILS fund) posts 100% of the limit as cash collateral upfront. Collateralised reinsurance is a private reinsurance contract in which the reinsurer — typically an ILS fund — posts 100% of the policy limit into a trust account at inception, eliminating counterparty credit risk for the cedant. Unlike traditional reinsurance backed by a rated balance sheet, the cedant knows the money is there from day one.
How is Collateralised Reinsurance used in practice?
The ILS fund wrote $200m of Florida collateralised reinsurance attaching at a 1-in-30 year return period.
More Insurance-Linked Securities terms