Francis J. Sweeney and Heather Phillips review the development of the Catastrophe Risk Exchange (CATEX) to date.

CATEX is a computer-based trading system facilitating the global cession and assumption of risk on a real-time basis. First established in early 1997, it has achieved steady growth over the past 18 months; there are now 58 subscribing companies trading risk 24 hours a day, five days a week from trading screens on four continents. These subscribers account for over $140 billion total annual premium, or approximately 20% of the world's property/casualty market, making CATEX the largest electronically connected insurance market in history.

The Exchange is licensed by the New York Insurance Department as a reinsurance intermediary which acts in a neutral capacity. Subscribing companies are able to access the main risk posting board and all other components of the trading facility from around the world via the IBM Global Network. In this way, CATEX serves as an electronic trading floor for the buying and selling of insurance and reinsurance, and subscribers are able to transact reinsurance and insurance business with companies globally through a highly secure and flexible electronic environment. Using sophisticated electronic mail and on-line communications tools, subscribers can negotiate trades in complete anonymity until such time as both parties wish to reveal their identities. Trades can then be executed on CATEX and the necessary formal documentation produced. Finally, individual trades are registered and archived with CATEX, and summary pricing data are published on the system.

Expanded trading scope

While originally designed in the post-Hurricane Andrew era to facilitate the swapping of natural catastrophe exposures between parties, CATEX has greatly expanded the scope of trading to include all forms of insurance and reinsurance risk instruments across all lines of insurance business. This new course has greatly increased the potential subscriber base, and CATEX is currently pursuing a number of avenues to get these organizations connected.

The expansion in trading scope is reflected in the table which identifies the market and risk instrument types currently traded.

Overview of trading activity

The CATEX market has seen considerable growth in posting and trading volumes in recent months. From the time of the first posting in mid-February 1997, company underwriters and risk managers have posted over 450 deals on the system. Of this total, over 60 postings were placed on the system in June 1998 alone, immediately prior to the end of the 1 July renewal season, and heightened posting activity has continued through the months of July and August which are traditionally the quietest months in the annual insurance cycle. Over 20 of these postings have developed into complete electronic slips or contracts executed via CATEX, and most of these trades have been executed over the past three months. As traders get more comfortable with the system and the subscriber base increases, the ratio of completed trades to initial postings is expected to increase significantly. A growing percentage of the posted deals are originating from non-US terminals, a trend supported by the increasing number of trading terminals installed in London, Paris, Tokyo, Sydney and other global reinsurance centers.

Current trading activity includes numerous offers to cede or assume market loss warranties and other forms of indexed reinsurance to counterparties. Recent postings have also included real-time quotations on named hurricanes and tropical storms, such as Bonnie, Danielle and Earl, threatening the Caribbean and the east coast of the United States. These covers allow vulnerable insurers to obtain additional financial protection at any time prior to a hurricane's landfall. In the coming months, CATEX expects to see similar spot covers offered for US and European winter storm or freeze perils, and cyclone threats to risks in the Southern Hemisphere.

Other recent offerings have included initial postings of weather reinsurance covers - a new opportunity in the reinsurance industry which CATEX has been able to support and encourage. Also, several of the most recent trades have involved broker-to-broker dealing. Already, CATEX is influencing the way the insurance industry does business as trading companies find new ways to work together to get deals done.

As its subscribers continue to move steadily towards the electronic trading of risk, the Exchange expects to see transaction volumes increase dramatically for the 1 January 1999 renewal season. This projected expansion includes commitments from a number of larger subscribers to place a substantial portion of their business book, including renewal business, through the CATEX system.

Working with regulators at the New York Insurance Department, CATEX is currently finalizing the terms of a standard Risk Deposit Contract, which will allow non-traditional risk bearers such as investment banks, hedge funds, or wealthy individuals to put up funds equivalent to a reinsurance contracts limit to support the risk. Subscribers have demonstrated interest in this concept, which will allow for efficient risk transfer to these risk-bearers pursuant to the regulatory supervision of the New York Insurance Department, and which will also allow insurers to claim the ceded risk as reinsurance, rather than investment. Certainty of claims payment is a further major attraction of these contracts.

Trading system enhancements

CATEX 98, a new version of the trading software, was recently released and offers a number of the user-friendly features that our users have frequently requested (for example, the ability to group postings by market type). Most importantly, this new software is encoded on a CD-ROM that can be easily installed by any user on his or her own PC. This installation process will soon be superseded by a "thin-client," browser version of CATEX which was formally launched at a 29 September event at Lloyd's. Underwriters will be able to load software on their machines directly from the internet, and CATEX will be available directly on user desktops; it will no longer be installed on separate, dedicated machines requiring shared use by traders. The browser version will ease software distribution since any system modifications will become available to users as they log on to the system.

Another important addition to the system is the CATEX Document Center. This facility will allow users to place any number of documents supporting a trade (for example, spreadsheets of information, tables, word-processed documents, scanned images) on to a secure web site as a unique "bundle of information". This "bundle of information" can then be made available to other, individually selected, subscribers for their review and/or analysis. The document owner not only has control to specify who can have access to the documents, but can also control the level of access to the documents (that is, read only or download privileges). This document repository will allow far more detailed and complicated risk transactions to be completed via CATEX.

Once a trade has been completed on CATEX, a subscriber is then required to complete a trade report detailing the key aspects of the trade including strike price, rate on line and limit. Once available to other subscribers, these pricing data provide a measure of insight into key pricing trends in the broader marketplace. Once this trade report is completed, the participating subscribers will then receive an electronic copy of all the information in the document center - spreadsheets, word-processed documents, postings, mail messages or other communications relating to the deal - for their own records. This download can then also be used to populate their internal systems and databases, providing such information as:

* Underwriting guidelines.

* Pricing and rating details.

* Rate on line history.

* Credit risk information.

* Geographic location.

* Chronological history of the risk's development.

Business opportunities using CATEX

* By providing instantaneous access to an extensive electronic marketplace and powerful transactional tools, CATEX can greatly facilitate a company's ability to conduct its risk management.

* CATEX enables risk bearers to cede and assume business to other market players around the globe ensuring that they can find the best possible deal wherever it is in the world.

* Doing business with parties in other countries/continents and even time zones is made simple as electronic documents and files can be posted to the system and accessed by other parties for their review and analysis 24 hours a day seven days a week.

* CATEX allows all parties to negotiate the best possible rate/price as competitors vie to match or exceed offers made by other subscribers.

* Response times are greatly improved since 24 hour on-line access means parties may respond as and when they see fit.

* CATEX provides a secure environment in which only authorized parties may transact business.

* CATEX's sophisticated communications software allows parties to transact business in complete anonymity until such time as they wish to reveal their identities.

* Any party adding documents or details to the system has complete control over who has access to that information who can read or amend the information.

* Industry trends and pricing are easy to track, and new products can be rapidly developed and distributed to respond to these changes.

* Insurers can protect their capital and surplus against major catastrophes by using CATEX to spread their risk across numerous geographic regions/perils and business lines.

* Insurers are able to adjust and rebalance their risk portfolios on a real-time basis.

* The CATEX Infonet provides access to an unequaled array of insurance-related information sources via 8,000 internet sites.

CATEX web site

To provide additional information and a brief demonstration of the trading system, CATEX has established a web site at www.catex.com. The web site contains an abridged version of the current live postings available on the system, as well as an update on current developments relating to system design and usage.

Francis J. Sweeney is chief operating officer and Heather Phillips is trading specialist at CATEX.