World Economic Forum publish report on insurance-linked securities

by Artemis on October 9, 2008

The World Economic Forum, an independent, international organization incorporated as a Swiss not-for-profit foundation who are committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas, have released a report today which provides recommendations to help spur continued growth of the market for insurance-linked securities.

The report named ‘Convergence of Insurance and Capital Markets’ has been produced by the forum with help from industry partners such from the financial services industry such as Zurich Financial Services, Swiss Re, Allianz, Barclays Capital, State Farm, Deloitte and Thomson Reuters.

Initiatives cited within the report which are helping to push growth of the insurance-linked securities market include:

  • The International Swaps and Derivatives Association (ISDA) has formed two working groups to improve the standardization of derivatives related to insurance risks such as natural catastrophes, longevity and mortality
  • Separately, a group of insurers and reinsurers is setting up an entity to collect and provide data on European natural catastrophe losses, with a view to using the data as a basis for risk-transfer transactions
  • Swiss Re has created a total returns catastrophe bond index to provide a benchmark for investors in ILS catastrophe bonds
  • Exchanges such as the Chicago Mercantile Exchange and the Insurance Futures Exchange Services have recently begun to trade insurance-based derivatives
  • Further, insurance regulatory capital frameworks such as Solvency II are expected to bring more consistency to the types of securitizations used by financial institutions

One of the key conclusions drawn from the collaborative work which produced this report was that increasing visibility of the asset classes, providing renewed impetus for market development and placing insurance risk on the agenda of a larger and more diverse group of investors were all key for the market going forwards. A really interesting roadmap was drawn up during the project which shows potential routes to achieve these aims (see image below).

Other recommendations focus on expanding investor awareness and making the instruments easier to understand and access to try to push the acceptance of insurance-linked securities by mainstream investors. Key conclusions here are around standardisation of transaction structures, increasing transparency through better use of data plus education of investors and enhancements to risk assessment from both modelling firms and rating agencies to give better evaluation of risks attached.

All in a very interesting report and a great piece of work from the participants which will hopefully get wide publicity. The conclusions reached are in our opinion the right ones to help advance the market and ensure continuing growth.

Read the full report here (in Adobe PDF format).

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