Munich Re have published a new article on their website saluting the new found health of the insurance-linked security and catastrophe bond market. The article ‘Insurance-linked securities – the market celebrates its comeback‘ discusses the problems the market faced in 2008, the comeback of the market, the reasons ILS are here to stay and why they compliment traditional reinsurance.
They also make a mention of Solvency II and how that will affect ILS once it’s fully in force. Munich Re say ‘Under the new framework conditions of Solvency II, ILS will continue to gain in importance for insurers as the impact of risk transfer on the balance sheet will no longer be based on the form of the instrument but on its economic effect‘. That’s definitely a positive as it will make ILS easier to account for, more widely accepted and easier to understand. They also say ‘Other advantages of ILS under Solvency II result from the explicit consideration of the counterparty risk when measuring the amount of solvency capital to be held. As the transactions are usually fully secured (AAA security), the ceding insurer has lower capital requirements in this respect compared with a traditional reinsurance solution.’ Given that issuers are now resolving the collateral problems of last year by utilising new methods and much more secure, highly-rated assets the capital requirements of an issuer should be much easier to meet.
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