Insurance-linked securities: cat bond, cat fight
In hindsight, 2013 may be seen as the year in which insurance-linked securities (ILSs) became truly mainstream. ILS products such as catastrophe bonds, industry loss warranties (ILWs) and collateralised reinsurance became more popular and, importantly, products that traditional P&C reinsurers started to actively engage with and underwrite.
ILS products are seen by investors as a simple and uncorrelated asset class yielding reliable returns, with the perceived advantage that their simplicity eliminates the risk of disputes. External reporting indices allow the parties to know precisely when a policy is triggered and for how much.
But is it really that simple? Disputes in the ILS arena are more prevalent than one might think. Many ILS contracts contain confidential arbitration provisions meaning that disputes are often kept out of the press…
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In an LMAA charterparty dispute between Sun United and Kasteli, owners’ claims had been secured by money paid into an escrow account in the name of charterers’ solicitors.