Consortium to explore parametric bonds & instruments for systemic risk transfer

A newly formed public-private research consortium intends to explore innovative financial instruments that can be used for transferring systemic risks, with parametric bonds one of the solutions set to be studied.

The work is being undertaken by the Cambridge Centre for Risk Studies (CCRS) at the University of Cambridge Judge Business School, while funding will come from an international consortium of companies including Pool Re, the UK’s terrorism reinsurance mutual.

The goal of the research is to support the creation and extension of public-private market institutions and to develop specific new risk transfer products and advisory services to address systemic risks.

The research will cover off risks including pandemics, cyber threats, geopolitical change, financial crisis, and climate change.

Instruments set to be explored include: extensions of coverage terms for traditional insurance lines of business;
new types of insurance indemnification or risk sharing products; structured parametric bonds; corporate pools; bi-party swaps; and other financial instruments.

The research will explore the design of new financial instruments and also evaluate their benefits, in terms of return on underwriting capital and the potential consumer protection and societal benefits.

It’s hoped that the work will enable members to better collaborate with public bodies, nationally and internationally, in policymaking for risk reduction, hoping to improve global cooperation in reducing systemic risks.

Dr Michelle Tuveson, executive director and chairman of the advisory board at CCRS, commented, “We are honoured to be leading this private sector consortium – their guidance in steering our research will be invaluable as we create new private market risk management products and services together.”

Julian Enoizi, CEO of Pool Re, and chairman of the industry consortium, added, “The COVID-19 pandemic triggered the deepest economic recession in our lifetime. Our policies, preparedness and financial responses require a significant overhaul if we are to better equip and protect society from the next major systemic risk that threatens our way of life. The insurance industry is committed to coordinating and collaborating with the wider communities, and I am honoured to partner Pool Re Solutions with the Cambridge Centre for Risk Studies, who bring deep academic rigour to this new and expanding consortium.”

Dr Andrew Coburn, chief scientist at CCRS, also said, “Systemic resilience needs the foresight of systemic backstops to which capital markets can respond. Modelling to support new financial instruments will be critical in addressing future crises.”

Professor Daniel Ralph, academic director at CCRS, stated, “GDP-sized government interventions have been the solution to pandemic-sized events, but government action at this scale is typically ad hoc – better regulatory and financial structures are needed to protect societies from long term erosion of wealth.”

Dr Trevor Maynard, director of systemic risk research at CCRS, also commented, “We look forward to applying our world-class research techniques to test and develop many of the initiatives being proposed. This will advance our research on the causes, linkages, and protection mechanisms for future systemic threats to society and the economy.”

It’s encouraging that this research will include a detailed look at the potential for parametric risk transfer solutions that are structures as securities, so enabling the capital markets to be tapped for providing capacity to support systemic risk.

The insurance and reinsurance industry alone cannot absorb all systemic risks, so as new solutions are created to transfer these risks it is prudent to involve the capital markets and insurance-linked securities (ILS).