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Guy Carpenter launches indexed cat cover

Guy Carpenter has become the latest reinsurance broker to launch an index-based property catastrophe reinsurance product as an alternative to traditional risk transfer.

Unlike recently announced exchange-based innovations by Gallagher Re and RK Carvill, however, the broker’s SelectCat product allows retro reinsurers and other capital providers to access portfolios of reinsurance risks.

The company said it had already completed a transaction with the product and had seen an “overwhelmingly positive” response from the market since.

According to Guy Carpenter, the SelectCat approach retains the indemnity aspect of insurance protection, “engaging buyers in actively managing their portfolios and offering sellers more transparency of data and better control of exposures”.

The index is developed from a synthetic layer corresponding to a basket of programmes reflecting the risk portfolio a reinsurer wants to protect.

The company said SelectCat offers an effective hedge to issuers, while giving retro reinsurers and other capital providers a “higher degree of comfort” in assuming risks.

David Priebe, head of Guy Carpenter’s Specialty Operations said the broker began looking at index-based approaches as it recognised the need for a “more proactive approach” post-Hurricane Katrina.

“Though SelectCat was developed in response to hard market conditions, its innovative structure, superior exposure control and greater transparency make it a rational solution in all market cycles,” he added.

The product works like a collateralised debt obligation (CDO), using a portfolio approach that incorporates a number of programmes.

This, said Priebe, “can produce more predictable results than an individual programme”.

The announcement comes just as Gallagher Re is due to launch its real time trading of US property damage risk in a tie-up with NYMEX – the world’s largest physical commodities exchange.

RK Carvill, meanwhile, has teamed up with the Chicago Mercantile Exchange to trade hurricane futures and options.

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