This time of year always sees a glut of research papers and annual market reviews being issued as the reinsurance world meets in Monte Carlo and discuss the issues of the day. Swiss Re have issued a great new sigma study exploring the use of indices in transferring risks to the capital markets.
Both issuers and investors benefit from the use of clearly defined and regularly updated indices, the study says, by providing transparency for both parties and a defined index against which transactions are triggered. Data is key as any indices is only as accurate as the data it is modelled against and with increasing use of electronic tools within reinsurance we should expect index-linked products to grow.
Swiss Re see the use of indices helping to create more liquid markets as products linked to an index may be standardised more easily which can lower costs and therefore help to contribute to higher issuance. They also lower the barrier to entry a little for both investors and issuers as they make the products more understandable and accessible.
One piece of the study we’d like to highlight is Swiss Re’s comments that while index-linked transactions provide a great source of capacity they have also facilitated new product offerings. Swiss Re say that as they develop further these indices and associated products could provide a foundation for a new way of trading and pricing insurance risks, trading in these could provide a pricing model for the future. This is interesting and to some degree the weather risk market is almost doing this, equally fledgling risk markets such as HuRLOs could be adapted to be index based as well. Whether we will see a true index-linked way to trade in climate and weather related risks remains to be seen but the technology and data exists right now, it just needs a platform to kick start things.