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Capital Markets

Insurance-linked securities offer safety in numbers

Any product that combines the words “catastrophe” and “securitization” is going to be a tough sell in this market. But insurance-linked securities are a rare sector of spread stability and growth in the credit world. Louise Bowman reports.

A synthetic approach


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THANKS IN NO small part to their name, catastrophe bonds have always attracted attention. But they are only the most visible means by which risk is transferred from the insurance market to the capital markets – there are up to 15 other vehicles by which this can be achieved. These range from securities to derivatives, insurance-linked warrants (ILWs) and sidecars. Non-life risks have been transferred via club deals, cat bonds, collateralized insurance, sidecars and ILWs, and life deals have included life cat bonds, embedded value securitizations, surplus relief (Reg XXX) deals and life settlements.

According to Swiss Re, total insurance-linked bonds outstanding at September 2007 totalled $32 billion. The risks backing these bonds have ranged from US wind, embedded value and extreme mortality to earthquakes in Mexico, Taiwan and the Pacific Northwest and event cancellation. But this has been a long time coming, and the much-vaunted convergence between insurance and capital markets has been a topic of conversation for a very long time. A random Google search on the subject brings up a research document entitled Evaluating the effectiveness of index-based insurance derivatives in hedging property/casualty insurance by the index securitization task force of the American Academy of Actuaries.


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