Stroock Special Bulletin
“Structured Insurance Finance: From Cat Bonds to Regulation Triple X”
In the past decade, insurance and reinsurance companies have undertaken two interrelated categories of specialized finance transactions, which can be broadly described as, respectively, “structured insurance finance” and “insurance-linked securities” (ILS) offerings. Companies engage in these types of transactions for a variety of business reasons, including hedging against risk associated with the insurance and reinsurance products that they write, procuring financing in a cost-effective and tax efficient manner, taking advantage of certain opportunities for arbitrage within the insurance industry, satisfying credit for reinsurance requirements, and obtaining relief from regulatory capital requirements. This Stroock Special Bulletin focuses on two types of financings that fall within these categories. The first type – catastrophe bonds (or “Cat bonds”) – is one of the earlier forms of “insurance securitizations.” Cat bonds were developed by the property-casualty industry in the mid-1990s as a tool to shift a portion of the insurance industry’s risk exposure (in the form of insurance or reinsurance) in respect of excessive losses caused by natural catastrophes, to the capital markets (in the form of ILS). The second type – so-called “Regulation Triple X transactions” – is perhaps best categorized as a class of structured life insurance reserve-funding transactions.