Pandemic risks and regulatory concerns to spur mortality catastrophe bond issuance

by Artemis on September 10, 2010

The life reinsurance landscape is an ever changing beast particularly right now due to the sluggish economic recovery and ever changing regulatory environment according to Standard & Poor’s. In an article published yesterday S&P look at the regulatory environment and what they see the likely changes being.

They believe Solvency II is going to have a big effect on life reinsurance as it could cause consolidation which will allow the larger insurers to carry more risk which could reduce overall life reinsurance demand. In the short term they see the demand rising as insurers get to grips with their capital positions for Solvency II.

S&P note that recent issuance of mortality catastrophe bonds has been limited, with only SCOR and Swiss Re issuing deals in the last year. They note that while protecting insurers from extreme mortality risks due to pandemics these mortality cat bonds can also provide a new level of cover for terrorism events and anything causing significant change in mortality trends. That makes them potentially a very valuable piece of the risk management mix. S&P expects that the increased awareness of pandemic risks and the heightened regulatory concern about insurer financial strength is likely to spur further mortality catastrophe bond transactions as life insurers and reinsurers attempt to manage these risks.

The article also discusses longevity risks and the growing market for securitization and transfer of longevity liabilities. S&P say they expect this market to accelerate in the UK and Europe while the U.S. plays catch up due to underfunding in its pension market. They expect to see insurers and reinsurers playing a significant role in developing these markets.

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