ILS Glossary


Aggregate Cover

A transaction that is exposed to multiple events arising over the course of the defined risk period (e.g. all natural perils in Australia causing an aggregated industry loss of USD 10 bn). The amount of the accumulated losses determines whether the transaction is triggered or not. Typically, a minimum loss level is defined, which must be reached in order to count toward the aggregate. Contrast with Single-Occurrence Cover.

Attachment Point

For linear payout transactions, the loss in excess of the attachment point will be subject to payout.


Binary versus Linear Payout

For certain types of transactions, for example industry loss warranties, once the transaction is triggered, based on the predefined trigger type, the full monetary amount contractually agreed is paid out. This is known as a binary payout. Linear payouts, in contrast, scale linearly with the underlying loss upon which the contract is based.


Catastrophe Bonds (in Short Cat Bonds)

Catastrophe bonds (“cat bonds” for short) are securitized instruments that transfer a specific insurance risk (predominantly natural catastrophe risks) from the sponsor (e.g. [re-]insurance company) to an investor (e.g. ILS fund), who in return receives a risk premium. See Risk Transfer Instruments section for more details.

Capital Release

Transactions typically have a release schedule, which defines the time frame and threshold that have to be met in order for the collateral to be released after the risk period. If there is uncertainty after an event, part or all of the collateral can be blocked until all facts have been clarified and the loss amount is confirmed.

Ceding Commission

The ceding commission is a fee charged by the ceding company (i.e. insurance or reinsurance company) for the origination and management of the underlying policies. It is commonly used when entering into a quota share or sidecar investment.



Excess Mortality Risk (in the ILS Context)

This is when the sponsor transfers risk of mortality rates being higher than expected, typically with a need to cover exposure in case of a severe pandemic event.

Excess of Loss Reinsurance

Excess of loss reinsurance is a form of nonproportional reinsurance, which covers losses in excess of a predefined retention (attachment point) up to a predefined maximum limit (exhaustion point). For example, USD 10 bn excess USD 5 bn would mean that the protection seller would have to cover all losses exceeding the cedent’s retention of USD 5 bn up to a maximum of USD 15 bn.

Exhaustion Point

The exhaustion point defines the maximum level of coverage. The difference between the attachment point and the exhaustion point indicates the maximum liability of an agreement. Once the exhaustion point is reached, the transaction is exhausted and there is no more liability for any further losses.

Expected Loss (EL)

The expected loss is an average figure indicating the loss that can be expected over one year. It is a good first indicator for investors to assess the risk in a portfolio. However, for asset classes with high tail risks (like ILS), it is not the most appropriate figure to look at as losses can be significantly below the EL in most years and significantly above the EL in years with severe events.




Hard Market

Hard market conditions typically occur when insurance losses are above expectations (e.g. following a large catastrophe), or if any other events impact the capital structure of the (re-)insurance industry (e.g. financial crises or new regulations). As a result, less coverage is available in the market but demand is quite high, which leads to an increase in premium rates. Contrast with Soft Market.


ILS Private Transactions

ILS private transactions allow unrated vehicles like ILS funds to participate in the traditional reinsurance market. The (re-)insurer transfers certain risks from its own balance sheet to the capital market (e.g. ILS fund). See Risk Transfer Instrument section for more details.

Indemnity Trigger (Also: UNL – Ultimate Net Loss)

The indemnity trigger is based on the actual loss experienced by the sponsor (cedent). Sponsors typically prefer this structure as it leaves them with no basis risk. Indemnity triggers are less favored by investors, since quantifying the risk is more challenging, and the process of assessing and finalizing claims post-event can take longer. It is the most common trigger type in today’s ILS market.

Industry Loss Trigger

The industry loss trigger is based on the total insured loss of the entire industry. The industry loss data is typically provided by an independent company (e.g. PCS for the US, or PERILS for Europe). The basis risk for the sponsor can be quite significant, given the fact that the sponsor’s market share of the industry loss is rarely equal to the sponsor’s own losses. For the investor, however, this is a very attractive structure as it is more transparent, easier to quantify the final loss, and information is typically more quickly available.




Longevity Risk (in the ILS Context)

This is when the sponsor transfers the risk of mortality rate improvements over time being higher than expected, resulting in pension payments to policyholders for a longer period of time.


Modeled Trigger

The modeled trigger is based on the loss of the sponsor, calculated by an independent risk modeling company. In contrast to indemnity triggers, this structure reduces the risk of moral hazard, and claims are usually settled quite quickly. However, the sponsor, is exposed to a certain basis risk.




Parametric Trigger

The parametric trigger is based on measurable parameters such as wind speed or earthquake magnitude. Investors appreciate this structure because claims are settled quickly and there is hardly any risk of moral hazard. However, it is less attractive for the sponsor given the high basis risk.

Private Cat Bonds (Also: Cat Bond Lite)

Private cat bonds are typically smaller than traditional cat bonds and require less comprehensive documentation and disclosure (in contrast to the traditional Rule 144a cat bonds). This structure makes it easier for smaller sponsors to enter the market, as structuring costs are lower. However, they are typically less liquid than traditional cat bonds.

Profit Commission

Profit commission is a fee that rewards the ceding company for profitable underwriting. It is often charged on top of the ceding commission and is intended to serve as an incentive to the ceding company to write positive returns. The conditions (e.g. with or without a hurdle) are subject to the individual agreement.




Traditional catastrophe reinsurance transactions can include up to three reinstatements. This means that once a transaction has been triggered and a full loss has been suffered during the defined risk period, the reinsured will pay the premium again and in return will receive reinsurance cover for the remainder of the risk period. This gives the cedent protection against a high frequency of severe events. These structures are usually not used in collateralized reinsurance as the reinstatement liabilities would also have to be collateralized even though the reinstatement premium may never be paid, thus making the transaction very capital inefficient.


Second, Third or Subsequent Event Cover

A transaction that is only exposed to a second or subsequent event within the defined risk period (e.g. second US hurricane event causing an industry loss of USD 20 bn). This means that a single event within the risk period cannot trigger the transaction, regardless of its severity.

Single-Occurrence Cover

A transaction covering claims arising from a single predefined event during the agreed risk period (e.g. Japanese earthquake causing industry losses of USD 20 bn). Contrast with Aggregate Cover.

Soft Market

Soft market conditions typically occur when insurance losses are below expectations and coverage is readily available in the market. Consequently, the supply of (re-)insurance coverage outstrips the demand in the market, which leads to a decrease in premium rates. Contrast with Hard Market.


Tail Value at Risk (TVaR or Expected Shortfall)

Following on from the definition of VaR, the TVaR gives the expected value of the loss to the portfolio if the threshold loss value is exceeded.
For example, a 99%-VaR of USD 1 bn over a year would indicate that there is a 1% probability that an event loss will be equal to, or greater than, USD 1 bn in one year. If the corresponding TVaR is USD 2 bn then the expected loss to the portfolio, if this threshold is exceeded, is USD 2 bn.
In contrast to the VaR, the TVaR gives a better measure of the tail risk.

Transformer (Also: Special-Purpose Reinsurer)

A transformer is a reinsurance vehicle required for ILS private transactions. It serves the purpose of transforming a reinsurance agreement into a financial contract. The transformer enters into a reinsurance agreement with the sponsor and, at the same time, enters into a financial contract with the ILS fund. This is because ILS funds do not have a reinsurance license and consequently cannot enter into a reinsurance agreement directly.

Trigger Level

The trigger level defines the threshold that has to be reached before a transaction is triggered. For binary payout contracts, as soon as the trigger level has been reached, the full monetary amount that has been contractually agreed will be paid out.

Trigger Type

The trigger type defines the circumstances under which a transaction is triggered. There are four common trigger types: indemnity trigger, industry loss trigger, parametric trigger and modeled trigger. Mixed triggers are a combination of different trigger types, for example an indemnity trigger combined with an industry loss or modeled trigger.



Value at Risk (VaR)

VaR is a measure that quantifies the level of risk within a portfolio. For a defined probability, the VaR is the threshold loss value to a portfolio that would be exceeded over a certain time period.
For example, a 99%-VaR of USD 1 bn over a year means that there is a 1% probability that an event loss is equal to, or greater than, USD 1 bn in one year. In contrast to the expected loss (EL), the VaR gives a better indication of a portfolio’s diversification and drawdown potential.

Value-in-Force (ViF) or Embedded Value Monetization Transactions

The sponsor monetizes the future profits expected to emerge from a life insurance portfolio. The transaction can help free up liquidity to be used to finance further business development and, depending on the level of risk transfer involved, it can also provide a regulatory and rating capital benefit. The financing generated through the transaction is repaid with the future income (e.g. premium minus claims) earned from the underlying portfolio. The risk transferred is that a significant reduction of “in-force” policies, either through mortality or lapse, may affect the future cash flow income necessary to repay the financing. The value of the profits compared to the financing amount typically provides a large cushion to make the risk remote.