Credit Suisse plans operational risk bond
Credit Suisse Group AG, the global investment bank, is using a Bermudian-based special purpose insurer as a vehicle for an innovative bond that would offload risk from events including rogue trading and cybercrime.
The bond is reportedly similar to a catastrophe bond which insurers use to limit their exposures to natural disasters like hurricanes and earthquakes, but it covers different risks.
The vehicle being used for the bond is Operational Re Ltd, an insurer licensed by the Bermuda Monetary Authority with its address listed as that of ILS specialist Horseshoe Group.
The bond backs up an operational risk insurance policy provided by insurer Zurich, with Zurich retaining 10 per cent of the risk and the remainder being borne by investors in the ILS.
The bond illustrates how the ILS market is broadening in the type of risks it is covering. This has implications for Bermuda's traditional reinsurers who have already lost a large portion of catastrophe reinsurance market share to alternative capital in recent years.
The island has emerged as the world's major ILS hub and has benefited from the strong growth in this market. With more than $2 billion of new ILS issuance seen in the first quarter, according to Willis and Aon Benfield, the strong growth trend remains intact.
Steve Evans, founder of the Artemis.bm website, an ILS news hub, said this was a significant development in the ILS market.
“The Operational Re transaction is interesting as it demonstrates the use of the catastrophe bond structure, or at least a securitisation with a risk-linked trigger, as a useful tool for transferring a broader range of corporate risks,” Mr Evans told this newspaper.
“It's clear that the structure has much wider application than the catastrophe risk transfer that we are used to and it's hoped that other innovative transactions will come to the fore, providing a new way for corporates to access risk capital from institutional markets.”
“That said, these transactions are not for everyone and some of the traditional ILS market investors will find deals such as this do not fit their mandates or into their insurance-linked portfolios.
“But innovation and a broadening of ILS market perils in this way will help to attract new investors to the market and generate incremental deal flow from sponsors ILS funds have not encountered before.”
According to a report by Bloomberg News, Credit Suisse has approached bond investors, hedge funds and asset managers in recent months with an offer for the insurance-linked, five-year bond of up to 630 million Swiss francs ($648 million).
The securitised bond would cover losses of between 3.5 billion Swiss francs and 4.2 billion francs from operational failures, a broad category that includes unauthorised trading, computer system disruptions, fraudulent transactions and failures in regulatory compliance.
According to Bloomberg, citing two sources, Credit Suisse has received backing for its plans from Switzerland's financial regulator, Finma.
HSBC said in a note to investors last week that regulators may have misgivings with alternative forms of risk mitigation.