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Munich Re sells the ultimate risk

Insurance and capital markets: convergence or collision course?


In February 2008, Munich Re unveiled an unusual $1.5 billion programme for transferring extreme mortality risk to the capital markets. Through an issuing vehicle, Nathan, it launched an initial $100 million of principal-at-risk variable rate notes paying Libor plus 135 basis points to protect the company against large losses deriving from an exceptional rise in mortality rates in the US, Canada, England and Wales, and Germany.

What might trigger such a distressing event? A nuclear war would do it. More likely, it would be an outbreak of bird flu leading to a human pandemic. The World Health Organization has been notified of 348 cases of human infection with H5N1, resulting in 216 deaths between January 2004 and January 2008. Most cases of human infection have been linked directly to contact with infected poultry or contaminated surfaces, although the first human-to-human infection was reported in Indonesia in May 2006.

Governments and large companies have been considering how to respond to any pandemic break-out.

"This is a five-year deal," says Rupert Flatscher, head of the risk trading unit at Munich Re.

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