ILS Glossary


Aggregate Cover

A transaction that is exposed to multiple events occurring 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 vs. Linear Payout

For certain type of transactions, e.g. Industry Loss Warranties, once the attachment point is reached, 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 until the exhaustion point is reached.


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 timeframe 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 locked 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 significantly higher than expected, e.g. 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 non-proportional reinsurance which covers losses in excess of a predefined retention (attachment point) up to a predefined maximum limit (exhaustion point). For example, USD 100 m excess USD 500 m would mean that the protection seller would have to cover all losses exceeding the cedent’s retention of USD 500 m up to a maximum of USD 600 m.

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 are impacting the risk capital of the re/insurance industry (e.g. financial crisis 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 an attractive structure as it is more transparent, easier to quantify, and the final loss 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 significantly higher than expected, resulting in pension payments to policyholders for a longer period of time.

Lloyd’s Syndicate

A Lloyd’s syndicate is a member or group of members underwriting direct insurance and reinsurance business at Lloyd’s through a managing agency. Lloyd’s itself is comparable to a stock market for re/insurance business and is also well known for non-natural catastrophe coverage, such as aviation, marine, and energy. The strong rating of Lloyd’s, together with the broad access to reinsurance and direct insurance markets around the globe, makes this market an attractive prospect.


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 in issuance size 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, e.g. for a quota share or sidecar investment. 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.



Rated Reinsurance

A rated reinsurance company enjoys the benefit of not having to collateralize all the liabilities it underwrites. This is because the counterparty/cedent relies on the rating of the reinsurance company. As a result, a rated reinsurer can write reinsurance business in excess of its equity capital. Furthermore, a rated reinsurer has even broader access to the reinsurance market, as some counterparties/cedents prefer to transact with traditional rated reinsurers rather than through alternative structures (like ILS Private Transactions or Cat Bonds).

The rated reinsurance company’s direct access to the market combined with the leverage possibilities can make this structure more cost-efficient than alternative structures.


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 which 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 (risk capital) 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, given the threshold loss value is exceeded. For example, a 99%-VaR of -10% over a year would indicate that there is a 1% probability that an event loss results in a portfolio performance of -10% or worse in one year. If the corresponding TVaR is -20% then the expected loss to the portfolio, given this threshold has been exceeded, is -20%. 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 which 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, i.e. may suffer a loss. 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, e.g. an indemnity trigger combined with an industry loss or modeled trigger.



Value at Risk (VaR)

VaR is a measure which 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 -10% over a year means that there is a 1% probability that an event loss results in a portfolio performance of -10% or worse 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.