Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Growth trend likely to continue in insurance securitisation markets


A report published today by the International Association of Insurance Supervisors (IAIS) concludes that while the market for transferring risks to the capital markets is still relatively small when compared to traditional re/insurance it is likely to continue its trend of upward growth both in new business and eroding the market share of traditional reinsurance in new capital.

The report provides a really good overview of the alternative risk transfer, insurance linked securities and catastrophe bond markets including insights into deal structure, triggers used, a deep-dive into some of the more successful and unsuccessful deals and commentary on regulation. Essential reading!

Several interesting conclusions are drawn besides the fact that this market will continue to grow (which we agree with wholeheartedly).

  • Risk transfer compliments reinsurance and can benefit the insurance and reinsurance markets by adding capacity it can exercise some counter cyclical effects and help to make the markets more competitive.
  • Reliance on a single party within a transaction (such as a total-return-swap counterparty) leaves the deals open to risks from the wider financial markets and economy as a whole.
  • It provides a diversified alternative investment for capital market participants with little correlation to other investment products.
  • Developments in regulatory and supervisory frameworks (such as around the formation of SPVs) have followed the growth of the market but been uneven (we agree with this and it should be highlighted as an opportunity for regulators to help the market grow further by engaging with participants more).
  • As so few deals have been triggered to date it is difficult to draw conclusions as to how the market would cope with major attachment on deals. They also highlight a disjoint between the longtail nature of the risks ceded and the investors desire for a short term non-correlated investment opportunity.
  • Non-indemnity triggers deserve greater regulatory scrutiny from insurance supervisory bodies as they have yet to be tested and carry a possibility of basis risk appearing, this remains a key concern to them.
  • They highlight the fact that recent moves to improve asset quality held in transactions and to improve reporting on how those assets perform are a good move forwards. These advancements need to continue and in our opinion this is where supervisory bodies can really get involved by setting some minimum standards.
  • The IAIS will continue its work on regulating the sector and will be publishing specific guidelines for the insurance securitisation market.

Overall it’s a positive and well balanced report that you all should read, particularly the insight into why certain deals have failed or had issues. Download the report in PDF format from the IAIS website here.

We’d also like to thank the IAIS for kindly referencing Artemis within their report, a most unexpected pleasure.

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